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76th Con oBEssl av^jkrvx? /Dooumbnt 

l8t Session / BU^INAiii. ^ No. 28 



NATIONAL ECONOMY AND THE BANKING 
SYSTEM OF THE UNITED STATES 



AN EXPOSITION OF THE PRINCIPLES OF 

MODERN MONETARY SCIENCE IN THEIR 

REp^TION TO THE NATIONAL ECONOMY 

AND THE BANKING SYSTEM OF THE 

UNITED STATES 

BY 

ROBERT L. OWEN 

Former Chairman^ Committee on Banking and 
Currency f United States Senate 




PRESENTED BY MR. LOGAN 

January 24 (legislative day, Jan. 17), 1939.— Ordered 
to be printed with illustrations 



UNmSD STATES 

GOVERNMENT PRINTINa OFFIOB 

WASmNQTON t 1«S» 



FOREWORD 



Twenty-five years ago today Woodrow Wikon, in the presence of 
members of his Cabinet, chief executive officers, and leaders of the 
United States Senate and House of Representatives, approved the 
Federal Reserve Act. Three solid gold penholders and pens had been 
prepared for the occasion. Three origmal copies of this act were 
printed in parchment and signed by Hon. Champ Clark, Speaker of 
the House of Representatives; Hon. Thomas R. Marshall, President ot 
the Senate; and the President of the United States. 

One of these copies went to the Secretary of State, Hon. William.' 
Jennings Bryan, for permanent record. One of the copies was pre- 
sented to Hon. Carter Glass, chairman of the Committee on Banking: 
and Currency of the House of Representatives, and one was presented' 
to the chairman of the Committee on Banking and Currency of the 
United States Senate. One of the gold pens was given to Hon. 
William Gibbs McAdoo, Secretary of the Treasury; one to Hon. Carter 
Glass ; and one to the chairman of the Senate committee. 

This act was generally regarded as the greatest achievement of that 
administration. 

Under this act $40,000,000,000 of liquid money was created to 
finance the World War. It financed not only the United States but 
financed to the extent of billions of dollars Great Britain, France, 
Italv, and their allies. **That one act won the war," said John 
Skelton Williams, the Comptroller of the Currency. 

The United States came out of this war in a highly prosperous 
condition. This prospeiity was the result of the expansion of credit 
and currency which enormously stimulated production and employ- 
ment. 

In 1921 those in control of the Federal Reserve System contracted 
credit and currency by the use of the great powers of the Federal 
Reserve Act. It resulted in depression. 

Again in 1929-32 another depression followed the contraction of 
the inoney supply. And a third depression took place in 1937 from 
a similar cause. 

The Federal Reserve System is supported by men of all parties. 
Under no circumstances should it be considered in a partisan light. 
Its operation vitally affects the economic and financial condition of 
the entire country, including the Government itself. 

There is lacking in the United States an informed public opinion 
as to the cause and cure of depression. 

With the hope of laying the foundation for a better understanding 
of the principles of the Federal Reserve System and the use of its 
powers to restore prosperity and prevent future depression, this 
commentary is submitted for the considerate judgment of leaders of 
public opimon in the United States. 

Trustmg that this vital matter may not be clouded by any attempt 
to fix the blame on anybody, or to attempt to gain partisan advantage, 
I remain 

Your faithful servant, 

R. L. O. 

December 23, 1938. 

m 



TABLE OF CONTENTS 



Chapter I: »••• 

Why money was invented.. — .. 1 

• Why money originally had intrinsic value — 2 

Why it is no longer necessary for money to have intrinsic value..... 3 

Chapter II: 

Money a creature of law . i 

The creation of money a sovereign power of government 6 

Chapter III: 

The forms of money_- - _. -.- 6 

The proper definition of money as employed in the United States 7 

Chapter IV: 

The function of money as a medium of exchange 9 

The function of money as a measure of value.. 9 

The difference between value and exchange value - 10 

The function of money as a storage of value. _. • 10 

Chapter V: 

Currency as money _ 11 

Modern check money, or bank credit 18 

How this modern check money is created 14 

The relative volume of currency and check money 16 

Chapter VI: 

The necessity for stable money _. 18 

The evils of unstable money _ 19 

The natural instability of our present-day check money 20 

The money illusion _ 21 

Chapter VII: 

The orthodox traditional theory of money 22 

The quantitative theory of money__ 23 

Chapter VIII: 

The dollar index and the price level _ 24 

How prices are influenced 25 

The alleged "disequilibrium" of wholesale prices 28 

The volume of money and the price level 20 

Chapter IX: 

The relationshii) of the price level to factory employment and wages. 80 

The price level in relation to car loadings , 88 

The effect of the volume of money on the volume of construction 

contracts 88 

The effect on exports and imports of the contraction of credit and th© 

money supply _ 84 

The effect on our business enterprises of the contraction of credit and 

the money supply 84 

Chapter X: 

The index of industrial production 85 

The relationship of the index of industrial production to the price level. 80 

Chapter XI: 

The inadequacy of the present terms "the price level" and "the pur- 
chasing power of money". - , 87 

Chapter XII: 

The methods by which money is expanded and contracted.. _ 88 

The velocity of demand bank deposits _ 42 

How demand bank deposits created by the Government flow into use 42 

The money created by the people.. 48 

Credit expansion through the sale of stocks 45 

T 



VI OONl!9iar£8 

OhftpierXIH; pm# 

Money in circulation wa an index of national income _ 47 

The volume of money employed in- all economic activities. 40 

The origin of buying power. _ 60 

Chapter XIV: 

The problem of unemployment 52 

Money in relation to debt _ 67 

The interest on debt. - _ _ _ 67 

Labor and money. ,. 69 

Abundance or scarcity 60 

Monopoly and monpy _- 61 

One hundred percent reserves. 62 

Chapter XV: 

The call rate on the security exchanges 63 

The control of the security exchanges 64 

Chapter XVI: 

The inflation bogey _ _ 66 

Chapter VXII: 

The Constitution of the United States on money _.- 67 

The powers of the Board of Governors of the Federal Reserve System 69 
Chapter XVIII: ' 

The importance of a national monetary policy 70 

Chapter XI A: 

The necessity for Government management and stabilization of 

money.. 73 

Chapter XX: 

The effects of stable money _ 76 

On the banks - 76 

On manufacturers - 77 

On merchants __ _ 77 

' On contractors _ - 77 

On corporate and individual incomes _ 77 

On agriculture __ 78 

On wage earners - 78 

On teachers -- 78 

On Government income _ 78 

On the creditor class _-_ - 79 

On the submerged third _ 79 

On the wealthy class _ - 79 

Chapter XXI: 

The capitalist system _ - 79 

Chapter XXII: 

Intemat \otxal stabilization impracticable. 80 

The inadequacy of the former gold standard — _ 82 

The modern use of gold and its possibilities - 88 

Foreign exchange 84 

Chapter XXIII: 

Storm signals - 86 

Public opinion and congressional control 87 

Appendix.. - - 8g 

Glossary -- - jy 

Lincoln^s monetary policy 91 

Monetary chart No. 1 - 92 

Monetary chart No. 2 - 93 

Table — Selected series on business activity 94 

Some improvements that have been accomplished and some that are 

neededin our monetary system - - 97 

A few quotations of notable leaders _ 98 

Noted members of the Stable Money Association - 106 

Court decisions on money - - - - •• 108 

Testimony of Robert L. Owen before committees of the House and 

Senate 108 



NATIONAL ECONOMY AND THE BANKING SYSTEM OF THl 

UNITED STATES 



Chaptbb I 

WHY MONBT WAS INVBNTBD 

Money was invented as a measure of value to enable people to 
-exchange anything they had to seU for what they wanted, whether 
services, commodities, or property. 

In the earUest days of civilization men were compelled to rely 
upon barter, to exchange a cow for so many sheep or goats, to exchange 
a bow and arrow for a deerskin. Under sucb conditions there was 
little or no incentive to manufacture the things people wanted in 
quantity. There was also no incentive for merchandising. There 
were no factories and no need for improved transportation to ship 
^oods from one point to another. 

Many centuries ago. gold and silver were employed as a medium 
of exchange because tney were universally desired for their beauty, 
resistance to corrosion and rust, compactness, and malleability. 
They were particularly desired for ornaments. Therefore, they came 
into use as a medium of exchange and as a measure of value. 

Obviously, without money, a farmer who brought to town his 
vegetables, fruits, eggs, chickens, milk, and butter could not, through 
barter, go into a store and buy shoes and stockings, shirts, and other 
clothing in exchange in barter for these, articles. It was necessary 
for him first to convert the things he had into money and with the 
money obtained to buy the things he wknted from the store. He 
also needed money with which to pay the doctor and the dentist. 

Thus, money was invented as a common denominator of products 
and services for sale. Money became a measure of value and wa# 
employed as a mediimi of exchange. Also, since money could be 
employed at any time, it became a means of storing value which 
could DC instantly used in buying anything desired. So that money 
thus had three distinct purposes: As a measure of value, as a medium 
of exchange, and as a means of saving or hoarding against the day 
of need. . i . 

Of course, money, when invented, was capable of minute subdi- 
visions whether it was of silver or gold. 

All modem money is. capable of minute subdivision. The mpney 
of the United States for example, consisting of the dollar, is divisible 
into one-tenth of a dollar, called a dime; one-hundredth of a dollfir^ 
called a cent; and one-thousandth of a dollar, called a mill. Thil 
facilitates addition and subtraction and the keeping of accounts; 
One of the impoitant reasons for the invention of money was to enable 
men to keep an account of their indebtedness to each other witli 
accuracy, so that repayment could be made with precision and 
certainty. 



2 NATIONAL BCONOMT AND THE BANKING SYSTfiM 

The monetary unit in the United States was declared by law on the 
5th of April 1792/ in a statute signed b^ President G^r^e Washington. 
This dollar has been the monetary mut of account in heu of the other 
forms of money from that day to this. 

WHY MONEY OBIGINALLT HAD INTRINSIC VALUE 

When money was first invented, principallj^ in the form of silver 
and gold, it was necessary that the commodity silver or the commodity 
gold employed as money should have, in itself, exchange value. It 
was necessary that it should have^ intrinsic value because at that 
time there was no government exercising sovereignty of a dependable 
stability which could by law regulate the value of money or regulate 
the quality and quantitv of the commodity to be employed as money. 

As time processed the modem nations minted corn tokens of gold 
and silver which had at first dependable intrinsic value but which 
were subject to chknge by the authority of the government, so that 
from time to time many governments were found, for their own con- 
venience, changing the metallic intrinsic value of the gold and silver 
coin by using alloys of metal of less value. 

What proved to be more important was the instability of the issu- 
ance of money by pvemment. For example, the French Govern- 
ment at the beginmng of the World War had about 16 billion paper 
francs redeemable on demand in gold which were circulated in France 
as the equivalent of gold. Under the extrenie exigencies of the war, 
the paper franc was expanded to about 80 billion francs and was no 
longer convertible into gold as it had been previous to 1914. As a 
consequence, this currency, which was deemed to be on a gold stand- 
ard, diminished in its purchasing power to approximately one-fifth of 
what it had been before, and at present is worth about 2.8 cents 
instead of 19.3 cents (pre-war value) because of recent expansion and 
because of a loss of gold with which to redeem it. 

Because money having intrinsic value, such as gold, is preferred by 
the people to paper money having no intrinsic value, when the two 
moneys are both in circulation the gold money will be hoarded and 
disappear whenever there comes any undue expansion of the paper 
money. For this and other reasons all of the nations in the world have 
now abandoned the use of gold as domestic currency. 

The money of the United States depends for its value not on the 

gold content of the dollar but strictly on the credit of the United 
^ tates and the demand for such money, with which to pay taxes, 
interest, the cost of living, etc. 

WHY IT IS NO LONGEB NECESSARY FOR MONEY TO HAVE INTRINSIC 

VALUE 

The need for an intrinsic value of money which existed in former 
years no longer exists in the United States. In previous times govern- 
ments afforded no dependable security in the volume of money and 
in the regulation of the value of inoney. Their paper nioney was 
liable to expansion to a point where it decreased in purchasing power. 
Therefore tne people preferred gold as money because its purchasing 
power did not fall as paper money did. But unfortunately for the 



NATIONAIi ECONOMY ANt^'mmmAmmQ STSTBM J 

8tabUit;sr of money in those <liiy»,vwii<&^^^^ money began 

to fall m value, gold mpne^r was held by the people and hoaraed ^d 
thus retired from circulation^ iiiidei^ the W^ the so-called 

Gresham law^ This law is no longer aplfUcable^ in the United States 
because the Congress of the United States^^ having learned that^ld 
as money in domestic circulation was a souirce of weakness, abolished 
the use of gold in our domestic circulatiohV and conjBned its use to, 
international exchange as a commodity, the price of which wai 
arbitrarily fixed at $35 an ounce. 

Now all paper money has, for the same reason, been made legal 
tender. The value of this money is determined by the demand for it. 
The demand is so great and the credit of our Government is so high 
that legal tender currency has not only the purchasing power which 
the gold dollar had in 1926, but it has a present purchasing power- 
index of 130 (December 1938). In other words, it has a purchasing 
power which 4as increased in terms of 784 listed commodities sold^ in 
the wholesale markets by 30 percent as compared with 1926, which 
had a normal predepression price level of 100. 

The further reason why it is no longer necessary that our legal- 
tender money have intrinsic value is the coUosal demand for money, 
as compared to the supply of money. In 1926 the demand for check 
money was demonstrated to be $846,000,000,000 as proven by the 
amount of check money debited on the books of our banks. 

In 1929, the volume of this check money rose to $1,230,000,000,000, 
which at that time was 100 times the total monetary gold supply Of 
the entire world and about 300 times the entire monetary gold supply 
in the United States. 

It is perfectly obvious that this turn-over of money through checks 
could not possibly have been supplied by the use of gold. The modern 
banking system has therefore created conditions which make the use 
of gold as money entirely impracticable. The use of gold for currency 
would prevent the huge busmess which is now being carried on by the 
American people. 

Another important reason why our money should not have intrinsic 
value is that it would deprive Congress of the power to regulate the 
value of money by regulating the volume of money. Congress^ could 
not regulate the volume of gold used as a currency, gold being limited 
in amount, by nature, and is subject to immediate hoarding and U^ 
shipment abroad if any question should arise to justify it. Congress 
can regulate the volume of money in the form of legal tender currency 
and also in the form of demand bank deposits (which will be described 
later) upon which check money is based. 

It thus follows that not only is there no longer any reason for our 
legal-tender currency having intrinsic value, but there is a compelling 
reason why our currency should not have intrinsic value.* It shoula 
have only extrinsic value. It should only have an exchange value 
as a token. Currency being a creature of Government, the value of 
which must be regulated by the Government, the control of the 
money supply must be kept within the control of the Government 
itself. 



4 K4TI0N AX* BOONO MY AKP THB BAIIKIKQ SYBTBM 

•;^•.■ ■■•_ 'CBAFrSE'II ; 

MOKST A CBEATITBIS OF tAW 

^ TChe mon<dy of the United States is a creature of law. The Constitu- 
tion of the United States gave to Congress the broad power exclusively 
io create money. It withheld and denied to the States this power. 
The, Supreme Court of the United States in the Legal Tender cases 
(79 U. S. 644), gave this interpretation of the Constitution. It has 
remained unchaUengeid and is not now denied by any informed person. 
We quote a portion of the opinion in the Legal Tender cases: 

CongJceaMi aa the legislature of a sovereign Nation, being expressly empowered 
by the Constitution "to lay and collect taxes, to pay the debts and provide for the 
<K>ini:nOn defence and^neral welfare of the united States," and "to borrow money 
on the credit of the United States," and "to coin money and regulate the value 
thereof ;and of foreign coin"; and beins clearly authorized, as incidental to the 
ttiercise of those great powers, to emit bills of credit, to charter national banks, 
i^id to provide a natioiial currency for the whole people, in the form of coin, treas- 
ury notes, and national bank bills: and the power to make the notes of the Govern- 
ment a legal tender In payment of private debts being one of the powers belonging 
to sovereignty in other civilized nations, and not expressly withheld from Congress 
by the Constitution; we are irresistibly impelled to the conclusion that the impress- 
ing upon the treasury notes of the United States the quality of being a legal tender 
in payment of private debts Is an appropriate means, conducive and plainly 
adajpt^d to the execution of the undoubted powers of Congress, cons'stent with the 
letter and spirit of the Constitution, and therefore, within the meaning of that 
instrument, "necessary and proper for carrying into execution the powers vested 
by this Constitution in the Government of the United States." 

In addition to the broad power exclusively to create money for the 
people of the United States, the Constitution^ in article I, section 8, 
paragraph 6, gave Congress the explicit direction "to coin money and 
to regulate the value thereof * * *.'* 

When the State banks issued paper money, Congress imposed a tax 
of 10 percent annually upon such paper money and suppressed it. 

The Supreme Court held that the term *'to coin money" meant to 
print money on paper as well as to impress the Government stamp on 
metal 

All of our paper currency is therefore directly authorized by the 
Constitution, as interpreted by the Supreme Court. All such money 
is necessarily "fiat" of government and is printed on the printing 
press. It is necessarily "fiat" money, or "printing-press money," 
a]thoug:h these terms have been used derisively by those who preferred 
p)ld coin as money, or who preferred paper money made redeemable 
m gold coin. 

No one understood the powers of the Government in relation to 
money better than Abraham Lincoln. As a means of preserving the 
Union, Lincoln issued legal-tender money in 1861 that was receivable 
for all public and private debts. This money never fell below gold 
parity. 

On March 14^ 1900, the Gold Standard Act was passed by the 
Congress, declarmg the dollar to be 26.8 grains, troy weight, of gold, 
mne-tenths fine. This act placed $160,000,000 of gold coin in the' 
United States Treasury to keep at parity all paper money issued, by 
promising to redeem on demand this paper money in gold coin. The 
act provided for the issuance of 3-percent gold bonds as a means of 
iupplementing this supply of gold redemption money in case this 
$160,000,000 should be depleted. 



NATIONAL SqONOKY AND rmiB BAKKIKQ BITSTIDH $ 

Up to the domestic demoncitizaUoa of g^^ in 1934, this gold tviai 
of $150,000;000 in gold coin bad not b^ depleted, for the slmpld 
reason that the demand for dollars was so great that the people did not 
care to redeem thrir pap« currency in goTd, 

In 1 933 Congress authorized the rresioent to change the yaliie of gold 
in terms of dollars. He did so, making gold worth $35 an ounce 
instead of $20.67 an ounce, as imder the Gold Standard Act. Under 
the act of January 1934, Congress demonetized gold in our domestic 
circulation and has accumulated gold in the vaults of the Ooyern- 
ment to the extent of $14,000,000,000. Gold is still flowing into the 
United States from other parts of the world for the simple reason that 
our legal-tender dollar has a greater purchasing power in the United 
States than gold at $35 an ounce. 

THE CREATION OF MONET A BOVEBEIGN FOWEB OF QOVERNMBNT 

When the Constitution of the United States, gives the exclusive 
right to Congress to coin money and regulate the value thereof , it 
should be obvious that it gave the exercise of a sov^rei^ power 
extending over the 48 States, Territories, and dependencies of thie 
United States. By its very nature, the function of the creation of 
money should be exercised by the^ Central Government alone, as a^ sov- 
ereign power. It would be impossible, if this power were subdivided^ 
to regulate the value of money by regulating the volume of money. 

It is of the greatest importance to note that the failure of the 
Congress of the United States to exercise this sovereign power led to 
the creation of monej by privately owned individual banks acting in 
cooperation with their borrowers. 

In 1863 President Lincoln was compelled to yield to the demand for 
the establishment of the nationial-bank system, under which individual 
banks were authorized to issue national bank notes based on the bonds 
of the United States. This resulted in the issue of national bank 
notes of various denominations by each individual bank. These 
notes were not legal tender but were generally received because 
Congress, in the exercise of its sovereign power, had authorized the 
banks to issue such notes. The national bank notes, however, are in 

S recess of retirement. They are being supplanted by the Federal 
Reserve note and the silver certificate. 

The Federal Reserve note is a note of the United States Govern- 
ment which was issued, or loaned, to the individual 12 Federal Reserve 
banks through the Federal Reserve agent at the headquarters of each 
bank against the security of bonds, gold, and other sound bankable 
assets. The issuance of these notes by the United States was an act 
of sovereign power. 

In 1933, as an act of sovereign power, they were all made legal 
tender. This issue exceeds $4,600,000,000. 

The silver certificate, consisting of $1 bills, sa^^s on its face that it is 
redeemable in $1 in silver. This means a coined silver dollar, or 
silver bullion at $1.29 per oimce. The present market price of silver 
(Julv 1938) is about 42 cents an ounce instead of $1.29 an oimce. 

Tne silver certificate, therefore, outside of its bullion value in silver 
is based upon the sovereign power of the United States, the credit of 
the Government, and the demand for the dollar bill. The demand for 



Q NA^IONAli B<X)NOMy AND THE BANKING SYSTE3M 

the dollar bill as a means of exchange is yer^ ^at. No one ever 
thinks of redeeming a silver certificate dollar bill m bullion silver.^ 

The coinage of the silver dollar, half dollar, quarter, and dime is an 
act of sovereignty; also the S^ent piece, the nickel; or the 1-cent 
j^iece of copper. 

So that all the currency of the United States, coined by the United 
States, is created by an act of sovereignty, universally respected by 
the American people. 

A check of a demand -bank depositor on a solvent bank is payable 
on demand in legal-tiender money. Thus the check is itself money. 
The check transfers from one person to another in this way legal- 
tender money, or the right to legal-tender money. 

The right of the national banks to receive deposits, subject to 
check, and the right of the national banks to make loans to private 
citizens, or to buy the bonds of the United States, thus making loans 
to the Government, is a grant by legislative power to the national 
banjbi to create moiiey. 

The State banks exercise the same privilege by implied consent. 
It must be remembered that money is **any thing havmg a conven- 
tional use employed as a medium of exchange and nieasure of value.'' 
A check represents a given number of monetary units employed as a 
measure of value. When it is ^iven by the maker to the payee, it is 
a medium of exchange transferring a fixed number of dollars from the 
maker to the payee and is convertible on demand into legal- tender 
eurrency. ~ . . 

In this manner, the sovereign right to create money, which exclu- 
sively belongs to the Congress, has been transferred to privately 
owned corporations, not only in the national banking system, but 
also to the privately owned corporations comprising the individual 
banks established under the laws of the 48 different States. 

Chapter III 

THE FORMS OF MONEY 

There have been very many forms of money employed in the 
United States, including not only gold and silver, nickel and copper, 
coined by the Government, but gold coined by private individuals 
and companies, and tokens of other metals emploved by private 
trading companies. In addition to these tokens, employed as money, 
there have also been printed many other forms called scrip, printed 
on paper, leather, metal, wood, etc. 

In the Chase National Bank of New York there are 2,000 forms of 
scrip money on display, a large part of which was made in the United 
States dunng the hoarding of currency in the depression of 1929-32. 

The Government of the United States in its bulletin on domestic 
coin sets forth the total issue of all types of coin employed bv thei 
people of the United States as money. A brief summary follows, 
1938: 

Gold - $4,226,218,477.60 

Silver""! I. — "" - 1, 481, 204, 639. 80 

Minor II 162,641,88a U 

Besides these issues by the Government, there were many issues by 
private persons and corporations (see the Standard Catalog of United 



NATIONAL ECONOMY AND TBE BANKING SYSTEM f 

States Coins and Currency, publisEed by the Scott Stamp & Coin Co,, 
New Yorik^City). 

In addition to these forms functioning as currency there was a greftt 
variety of stamps employed as money m payment of letters aiid par- 
cels transmitted by mail and in payment of inteimai revenue upon 
various articles of merchaiidise. They are designated in monetary 
units and fractions thereof. 

The most familiar form of money, outside of the fractional coin 
and currency, is the check of a depositor upon his demand-bank 
deposit, which transfers from the maker to the payee a certain num- 
ber, of dollars and fractional parts thereof. Over 95 piBrcent of our 
national monetary business is transacted by the use of tlie check. 
A check is a simple order on the bank to pay to the payee, or bearer^ 
a given number of dollars and its decimal parts thereof, and charge 
it to the account of the maker of the check. 

The advantage of the check, as money, is that it transfers from one 
person to another a given number of "dollars, no matter how laige, 
on a single sUp of paper. The transfer to the payee is jguaranteed 
by the bank, which is responsible for identifyijQg the signature of 
the maker and the signature of the payee when the check is cashed 
by the bank, or paid by the bank through the transfer of the demand? 
bank deposit from the maker to the payee. 

In this way the transfer of money is greatly facilitated, cheapened, 
and safeguarded. To pay a milhon dollars in gold and silver by 
transmitting the bullion would be expensive, require insurance, and 
take an unnecessary element of time. If money had to be transmitted 
by mail or express it would necessarily involve insurance and risk. 
A check which is lost can be immediately canceled and replaced. 

Another great advantage of check money is that it enables the books 
of businessmen to be kept with ease and accuracy and enables, 
them, from their bank books, to make up their income taxes, accountSi 
etc., with dependable certainty; whereas, if they paid their bills in 
currency it would be necessary for them -to keep receipts for all such 
transactions, and to take the currency in person and deUver it to the 
merchants or payee at a considerable expense of time and trouble. 

These difficulties are avoided by the check system which is safer, 
cheaper, and more expeditious. 

These are the fundamental reasons why this form of money has 
grown in public favor in the United States and that check money 
transactions have reached the collosal figures heretofore mentioned, 
as $845,000,000,000 of check money paid through the banks in the 
normal predepression year of 1926. 

THE PROPER DEFINITION OF MONEY AS EMPLOYED IN THE UNITED STATES 

Webster defines money as — 

* * * anything having a conventional use as a medium of exchange and 
measure of value. 

The Century Dictionary and Encyclopedia defines it thus: 

In a wider sense, any article of value which is generally accepted as a medium of 
exchange; also, by extension, something which, though possessing little or no 
intrinsic value, is recognized and accepted as a substitute for money as above 
defined, such as paper money; any circulating medium of exchange. 



NA*riONAL ECONOMY AND THE BANKING SYSTEM 

IVoifettsor Walkctr defines it as; 

Any medium, no matter of what it is made or why people want it, which no 
one will refuse m exchange for his goods. 

In recent years, since the passage of the Federal Reserve Act, check 
money has been used as a medium of exchange and accepted without 
discount bv the banks of the Reserve System and by the Reserve 
banks so that checks in transit go into the hundreds of millions of 
dollars at any given time. These checks function as money. They 
represent money. They are safeguarded against counterfeiting by law. 
They are safeguarded against fraud. They comprise the greatest 
medium of exchange and measure of value in the united States, their 
volume reaching the colossal figure in 1929. of $1,230,000,000,000. 
They transact over 96 percent of the monetary business of the United 
States; and even the currency which is employed by the people is 
usually obtained by cashing a check in the bank and converting the 
eh<Bck into legal tender money. 

Demand bank deposits, convertible on demand into legal tender 
currency thus constitute money, subject to immediate transfer from 
one person to another. 

The demand bank deposits, as of June 30, 1938, amounted to 
approximately $26,000,000,000. 

The total amount of currency in circulation outside of the United 
States Treasury amounted to $6,461,000,000 as of June 30, 1938. Of 
this currency, there was $712,000,000 held by the banks * of the 
United States for the puri)08e of cashing checks on demand. The 
banks also held as reserves in the Federal Reserve Banks, convertible 
into currency on demand, $7,878,000,000, as of June 30, 1938. The 
merchants and businessmen of the country held for change with their 
customers probably $1,500,000,000, although this amount has not 
been accurately ascertained. About $500,000,000 of currency has 
been destroyed or lost in i>rocess of time, or has gone abroad. The 
remainder of the currency in circulation outside of the Treasury is in 
. the pockets of the people or hidden away, representing money which 
individuals hold as savings deposits and hoard as savings deposits, 
and a balance which is actively employed every day by the people 
in their daily purchases of commodities and services. It has been 
estimated that the currency received for wages and salaries has a 
turn-over of approximately 20 times per annum, on an average. This 
estimate of turn-over is merely a rough guess not capable of accurate 
determination. 

It is estimated that check money actively employed in transacting 
the business of the coimtry has a turn-over of approximately 60 times 
per annum for the reason that money so employed is used as economi- 
cally as possible. In 1929 when the demand bank deposits were 
$24,000,000,000 and the time deposits, quickly convertible into demand 
bank deposits, were $10,000,000,000, the actual check money amounted 
to 50 tunes the demand bank deposits, not counting any turn-over 
whatever of the time deposits. 

So we see that the money of the United States consists of currency, 
'demand bank deposits, and checks drawn against demand bank 
deposits* 

The modem use of the word * 'money" is expressed very well by the 
statement made by the Honorable Marriner S. Elccles, chairman of 

t Mcmbtr banks F«d«rftl B«Mrye System. 



NATIONAL EOONOMY AND THUI BAKKINQ SY8TBM jf 

the Board of Governors of tJje Federal Beserve System l>eforej1lfee 
Banking and Currency Committee of ^e House of Representative^; 

In purchasing offerings of Government boiids; thei banking syiBtiiici 4a ft^^^^^^ 
creates new money, or bank deposits. When the banks buy a billion dollAinic^ 
Oovernment bonds as they are oflTered— and you have to coiisider the banking 
system as a whole, as a uniWthe banks credit the deposit account of the treasury 
with a billion dollars. They debit their Government bond account a billion 
dollars, or they actually create, by a bookkeeping entry, a billion dollars. 

Chapter IV 

THE FUNCTION OP MONEY AS A MEDIUM OF EXCHANGE 

The chief use of money is as a "medium of exchange.*' This 
means a medium through which the exchange of property, com-^ 
modities^ or services of one citizen can be transferred for tne propcfftyi 
commodities, or services of another citizen. In other words, a citizen 
who receives payment in exchange for his labor, as wages or salary^ 
receives it in money. He then uses his money to buy the services ana 
labor, or the products of the labor, of another citizen. A farmer 
sells his products, such as com and wheat, for money and uses the 
money as the medium of exchange with which to buy any of a thou- 
sand articles for sale in, say, a department store. In this way the 
money becomes a medium by which he exchanges his products for 
the products of other people, collected from the ends of the earth in 
a department store. 

A citizen who receives his wages in money, u»es the money to buy 
small services, such as the money due for the newspaper, for stainps, 
for express charges. Thus money is a medium of exchange for the 
labor of the citizen, for the services of government, and for the 
services of corporations. 

\ This use of money as a medium of exchange is of supreme importance 
'and~lias increased in modem civilization to an extent not generally 
understood. Money, as a medium of exchange, is required in order 
to pay taxes, interest, Uving expenses; the expense of manufacturing 
goods, the expense of transportmg commodities, the expense of selling 
and advertismg commodities, and the expense of the professional 
services of the doctor, dentist, and lawyer. Money is needed for the 
sale of all the commodities in the wholesale markets. Money, as a 
medium of exchange, is needed for the transfer of stocks and bonds, 
real estate, equities, property, and services of all kinds. 

This demand for money, as a medium of exchange, is what givcis 
value to money as a creature of law, although the money itself ha^ 
no intrinsic value. As previously stated, the check mon<3y, debited 
on the books of all the banks of the United States in the year 1926^ 
was $845,000,000,000, and in 1929 was $1,230,000,000,000, which 
demonstrates the enormous use to which money as a medium of 
exchange is employed. 

THE FUNCTION OF MONEY AS A MEASURE OF VALUE 

In order that money may be used as a **medium of exchange," it 
must have the quality of being a "measure of value.'' Money in the 
market place measures the value of commodities. Money in tne 8ecu<* 
rity exchanges operates as a measure of value of stocks and bonds* 
Money measures the value of real estate. Money is used as a measuM 



10 NATIONAL ECONOMY AND THE BANKING SYSTEM 

^ T«lue for public services^ such as carrying the mailSj express services^ 
I)lrofess]^^ semces^ and transpk>i:taU^ Money is used as a measure 
^f Value in wurance policies, in savings accoimts, in evidence of debt, 
such as bondjs and notes. 

Money may be employed as a measure of value in formS^where such 
mone^ does not function as a medium of exchange. Ordinarily it 
f tiiictioiis both as a **medium of exchange'' and as a ^'measure of value.'' 
But moihey may be used as a measure of value without being actively 
employed as a medium of exchange. 

A savings account and a time deposit accurately measure the 
value in monetary units of the debt due to the depositor, and even a 
demand bank deposit may be a measure of value of the depositor's 
ftccount in monetary unite without such demand deposit being em- 
ployed as a medium of exchange. A demand deposit which is held 
pjr the depositor unemployed, or inactive, is a measure of the value. of 
hi8 deposit; but, if it is not emploved to pay othere, it is not a medium 
of exchange except in a potential sense; tnat is, it may be converted 
faito a medium of exchange by giving it circulation. 

THE DIFFERENCE BETWEEN VALUE AND EXCHANGE VALUE 

The air we breathe is of great value to life, but is has no exchange 
value. It is not a subject for merchandising. A bushel of wheat has 
value as food to the man who raises it, and eats it, but that trans- 
action involves no exchange value. The food which Robinson Crusoe 
jtouiid on the island had no exchange value, not even for barter. 

The exchange value of a commodity depends upon the exchange 
of the commodity for other commodities by barter or by selling for 
money. The exchange value of wheat by barter depends upon the 
supply of the wheat, the demand for the wheat, and the sujjply of the 
commodity and demand for the conunodity with which it may be 
exchanged, as so many bushels of wheat for so many sheep. The 
exchai^e value of wheat in terms of dollars depends upon the supply 
of wheat, the demand for wheat, and the supply of dollars and the 
demand for dollars. 

The exchange value of money for labor could not be better exem- 
plified than ^ to recall that in the days of Christ 1 penny paid for a 
day's labor in the vineyard. A day's labor in the vineyard now has 
the same value as then, but not the same exchange value in pennies. 
'The exchange value for a day's labor then was 1 penny. It is now 
300 pennies or more. The reason i« perfectly plain ; pennies are now 
300 times as numerous as they were then. A day's labor buys more- 
pennies because the pennies are 300 times as numerous and the- penny 
now buys only one three-hundredth part of what it bought then. 
The purchasing power of the penny depended upon the number and 
gupply of pennies. 

THE FUNCTION OF MONEY AS A STORAGE OF VALUE 

Money in terms of monetary units of account is also a storage of 
value. A farmer sells his cattle for $2,000 and receives for the $2,000 
a demand deposit. This is a storage of value in lieu of the cattle 
which he had sold. 

, He sells his demand bank deposit to the banker for a time deposit 
on which he receives an annual interest. This money is a storage of 



NATIONAL ECONOMY AN1> THB BANKING STStBM |J 

value and all ixiyestment. He mft^ transfer his time deposit i^lb li 
savings account, on which he receives interest at stated intervals* 
This money also becomes a storage of value. Or he may invest his 
demand bank deposit by buying the bonds of the United States or of 
an industiial corporation. The bonds Would be an investment and a 
storage of value m terms of money. 

A man may convert his check mto legal**tender currency and hold 
the currency as a storage of value for future use. It often happens 
in periods of depression that citizens hoard currency as a storage of 
value and take it out of circulation as a current memum of exchange. 
Citizens convert stocks and bonds into demand deposits on a large 
scale in a depression and hold these demand deposits as a storage of 
value for future investment or use. Such demand deposits, thus 
withdrawn from circulation, constitute a storage of value but do not 
circulate as a medium of exchange. 

In this manner the amount of money circulating as a medium of 
exchange may be diminished by hoarding demand deposits and may 
be increased by returning demand deposits to active use for the trans- 
action of current business. 

Chapteb V 

CURRENCY AS MONEY 

The currency of the United States in circulation outside of the 
Treasury is used as a medium of exchange only when actively employed 
by an individual as a medium of exchange. The currency of a country 
wliich is held by the banks as a means of paying checks in legal-tender 
money is not m active circulation until it actually passes into the 
hands of the citizen, who transfers if from one hand to another. If the 
citizen withdraws from the bank a thousand dollars in currency and 
puts it in a locked box, it is withdrawn from circulation as a medium 
of exchange. 

In the first quarter of 1933 an extraordinary demand arose for 
currency. It was satisfied by the issuance of about $2,000,000,000 of 
Federal Reserve notes, which passed into the hands of the banks and 
from the banks into the hands of the citizens who had called for it in 
payment of their demand bank deposits. A very large part of this 
currency was hoarded by the depositors who withdrew it from the 
banks. When their fears were allayed, almost all of this money 
returned to the Federal Reserve banks from which it came. 

During the depression of 1929-32 the hoarding of currency by the 
citizens of cash and deposits and the contraction of check money by 
the bank was so great that nearly a thousand cities and communities 
established barter exchanges and/or issued scrip money in large 
volume. Detroit issued about $40,000,000; Flint, $118,000j Grand 
Rapids, $840,000; Lansing, $40,000; Milwaukee, over $12,000,000; 
Dayton, $760,000; Atlantic City, upward of $5,500,000; Paterson, 
N. J., over $2,000,000; ICnoxville, more than $3,600,000; Birmingham, 
over $1,000,000; and Atlanta, about $6,000,000. All this scrip money 
was later retired. 

Another substitute for currency has been the issuance of clearing- 
house certificates. During the depression of 1929-32. over 
$600,000,000 of clearing-house certificates were authorized, although 
only partially used. 

123338—39 2 



12 



NATIONAL ECONOMY AND THE BANKING SYSTEM 



A greiit many citizens of small means do not keep bank accounts 
!wit keep pidy a hoard of currency. 

The currency held by stores and business houses as a means of 
makihg Change for customers does not function as a circulating medium 
of exchange but only as a means of changing larger bills into smaller 
bills for the convenience of the customer. As there are about fifteen 
hundred thousand stores and shops in the United States, the amount 
of such monejr held for change out of circulation as a medium of 
exchange goes into very large figures, probably exceeding the amount 
held by the banks. 

Of the total of the $6,000,000,000 of currency outside of the Treas- 
ury in circulation, it is probable that not more than a half of it cir- 
culates as a medium of exchange. People who need money as cur- 
rency draw it from the banks on checks, pay it out for services and 
commodities, and it passes into the hands of the merchants in exchange 
for goods, and/ by the merchant is redeposited in the bank. In the 
eveiit that ,tne ba^s need additional currency, they have over 
#6,000,000,000 of reserves in the Federal Reserve banks which they 
can convert into currency on demand, or they can negotiate loans 
with the Reserve banks, against adequate security, and obtain from 
the Federal Reserve banks, without cost. Federal Reserve notes as 
currency. 

The currency of the United States is printed in Washington at the 
Bureau of Engraving and Printing under great safeguards. The 
iractional coin of the United States is minted at the various mints of 
the Government and distributed through the Reserve banks to 
member banks, or directly to member banks, upon demand. The 
paper currency is printed on the finest quality of paper with silk 
thread running through and with the finest engravmg humanly 
possible so as to prevent counterfeiting. When these notes become 
soiled or mutilated, they are returned to the Treasury, destroyed 
under proper safeguards, and replaced by fresh clean notes. The 
following table shows the amount of present outstanding currency: 



Tablb I. — Paper currency, by denominations, and coin in circulation 
(Outside Treasury and Federal Reserve banks. In millloos of dollars] 



End of mouth 



Total 
In circu- 
lation I 



Coin and small denomination currency * 



Total Coin $1 » 



$2 



%6 



*10 



$20 



1987: 

July 

August 

September 
October... 
November. 
December. 

103S: 

January... 
February- 
March 

April 

May 

June 

July 



6,400 
6,624 
6,642 
6,658 
6,661 
6,660 

6,320 
6,334 
6,366 
6,397 
6,467 
6,461 
6,462 



4,942 
6,007 
6,019 
6,029 
6,043 
6,016 

4,789 
4,708 
4,784 
4,807 
4,866 
4,837 
4.836 



623 
629 
634 
635 
640 
637 

622 
620 
621 
622 
626 
627 
626 



488 
498 
503 
602 
604 
605 

474 
473 
473 
476 
487 
481 
481 



33 
33 
33 
_33. 
33 
33 

31 
32 
31 
31 
32 
31 
31 



894 
907 
908 
909 
912 
905 

856 
863 
860 
866 
877 
875 
879 



1,550 
1,674 
1,674 
1,676 
1,674 
1,660 

1,482 
1,489 
1,487 
1,498 
1,612 
1,603 
1,608 



1,454 
1,466 
1,467 
1,474 
1,480 
1,475 

1,424 
1,421 
1,412 
1,414 
1,422 
1,420 
1,410 



> Total of amounts of coin and paper currency shown by denominations less unassorted currency in 
TnMRiry and Federal Reserve banks. 

* Ineludea unassorted currency held in Treasury and Federal Reserve banks and currency of unknown 
dcoomtnationa reported by the Treasury as destroyed. 

• Paper currency only; $1 silver coins reptnted under coin. 



NATIONAL ECONOMY AND TEB! BANKING SYSTSai 18 

Tablk I.— Paper currency, by denomination, and coin in eireukUion — ^^Contlil^Aed 



End of month 


Large denominatioii eumncy * 


D^Btf 


Total 


»oo 


lioo 


$800 


«uooo 


moQ 


$10,000 


Mrt«l> 


1937: 

July 


1,620 
1,520 
1,627 
1,631 
1,626 
1,642 

1,632 
1,638 
1,673 
1,693 
1,616 
1,627 
1,618 


381 
382 
382 
384 
381 
387 

382 
382 
385 
388 
389 
391 
'o88 


697 
698 
702 
704 
701 
710 

705 
708 
718 
725 
727 
732 
727 


137 
187 
138 
138 
136 
139 

138 
138 
144 
146 
162 
162 
162 


288 
283 

285 
286 
287 
288 

288 
291 
300 
304 
307 
309 
807 


- 7 
7 
7 
6 
5 
6 

7 
7 
9 
12 
17 
17 
17 


18 

,.}} 

18 

14 
12 

12 
18 
16 
18 
24 
25 
27 


3 


August.. 


4 


September . , 


4 


October . 


6 


November.—. .... 


6 


December ... 


7 


1938: 
' January... 


1 


FebruMy.. J... 


3 


March ..^ 


8 


April 


8 


Aiay r... 


4 


June 


3 


July 


3 







) Includes un&«8orted currency held in Treasury and Federal Reserye banks and eurrraoy of onknoiink 

denominations reported by the Treasury as destroyed. 

Back figures: Bee Annual Report for 1937 (table 36). 
Source: Board of Governors of the Federal Reserve System. 



MODERN CHECK MONEY, OR BANK CREDIT 

Within the last half century there has taken place a great expansion 
in the development of bank credit and bank check money. The 
number of banks had greatly increased imtil 1921. Since then about 
half the number have failed or closed their doors. The fluctuation in 
the number of National and State banks for the years 1914 to 1935, 
is as follows: 

Tablb II. — National and State hanke 



Year 



Number of 

national banks 

(June 30 or 

nearest date) 



Number of 

State banks 

(June 30 or 

nearest date) 



Total numbor 

of banks 

(June 30 <w 

nearest date) 



1914. 
1915. 
1916. 
1917. 
1918. 
1919. 
1920. 
1921. 
1922. 
1923. 
1924 
1925 
192C 
1927, 
1928 
1929 
1930 
IMI. 
1932 
1933 
1934 
1935 



7,614 
7,597 
7,671 
7,699 
7,699 
7,779 
8,024 
8,150 
8,244 
8,236 
8,080 
8,066 
7,972 
7,790 
7,686 
7,530 
7,247 
6,800 
6,145 
4,897 
6,417 
5,425 



18,760 
19,008 
19,470 
19,896 
20,635 
20,821 
21,805 
22,410 
21, 914 
21,697 
20.916 
20,413 
19,882 
18,975 
18,256 
17,580 
16,605 
16,103 
12,601 
9,622 
10,418 
10,560 



79,i 
80,800 
30,158 
29,833 

28,908 
28,47« 
27,864 
26.78$ 
26.941 
26,110 
23,853 
21, $08 
19,046 
14,518 
15,835 
15,904 



Bouroer Board of Qovernon of tbe Federal Reeerye Bystem. 



;14 IIATIONAL ECONOMY AND T&Bi BANKING SYSTEM 

Th* the Uniiod States to create the 

itiotiej^reiqiiited by the people for the tra^^^ greatly ex- 

pan&ng voiinne of business naturially caused the people to resort to 
Ihe manufacture of money through the banl^s by loanfi. 

The system of handling money through checks was so cheap and 
convenient that the people expanded this systom to meet require- 
ments. The people were compelled, of course, to pay for such ac- 
conimodation, or creation of credit^ by the banks. 

Six-percent interest was estabhshed in most Statos as a legal 
rato of interest for loans. Sometimes, particularly in the Western 
States, the rates went higher. Sometimes, as in contracts, higher 
rates than the legal rate were allowed under special sections of the 
statute. . - 

Thus, the credit money built up by this checking system was based 
on debt, subject to interest and compound interest. This made the 
i^stem hazardous because of the fears of the changing value of the 
security upon which the loans of money were based when borrowers 
were compelled to liquidate by forced sales, whether voluntary or 
involuntary. 

When the banks call their loans they destroy the money supply by 
canceling the demand deposits. They thus increase the purchasing 
power of money in terms of stocks, property, and conamodities. 
\RiU8 the banks impair and diminish the value of their own securities 
and impair the solvency of their own borrowers, thereby bringing 
nun upon themselves and upon the industry and conmierce of the 
country. 

Every bank seeks its own safety. There is no cooperation or control 
of the money supply through the banks. Their policy of fear, and 
the consequences of fear, can only be neutralized by the powers of 
the Government, which has no fear and can expand the money supply 
when the banks, because of fear, contract it to their own ruin. 

HOW THIS MODEEN CHECK MONEY IS CREATED 

In the eighteenth century when the Bank of Amsterdam was 
founded it took deposits in the form of gold and gave receipts against 
the gold on deposit. Its operators found that the receipts served a 
better purpose than the gold itself. Under their system the gold was 
iii a vault thorouj^hly protected against robbery and the receipts 
were personal receipts transferable. These receipts functioned as 
money. So lone; as the bank followed the system of issuing receipts 
only against gold on deposit, its receipts circulated as freely as gold 
itseii . 

I^ the be^nning the operators of the bank never thought of issuing 
receipts against gold which they did not have, but as years went by 
and the depositors very rarely called for the gold and were content to 
circulate the receipts in place of the gold, the bank arrived at the con- 
clusion that they would be safe issuing other receipts not covered by 
gold but covered by mortgages and property which they thought 
might be convertible, if necessary, into gold. 

When at last it was discovered that the outstanding receipts of the 
bank very greatly exceeded the amount of gold the bank held, it re- 
sulted in the destruction of the bank by a flood of demands for gold 
that the bank could not supply. 



NATIONAL ECONOMT ANB T^ BANKXNQ BTSTSHi |S 

In the Umted States the ba&kd were permitted; on an ayera|^ 
prior to the Bank Act of 1935^ to make loans to an extent of 10 tim«9 
as great as the currency which they had available in vault or as reserves 
held for them by other banks. As a consequence the banks made 
loans against mortgages on cattle and horses, houses, the hypotheca* 
tion of stocks, goods, and on other assets deemed to be sound bankable 
assets. But usually the bank took security in excess of the amount 
of the loan. 

A citizen needing money for feeding a carload of cattle would give 
his note to the bank, secured by cattle in excess of the value of the 
note, and in excess of the corn necessary to feed the cattle. When the 
cattle were sold, the note would be paid with its interest and the 
borrower would retain the balance of the proceeds as his profit, 

A borrower mi^ht put up as security certificates of stock in some 
•corporation of which the banker knew. 

Whatever the security, the prime object of the banker was to 
make a loan that was safe, that would pay him the legal rate of 
interest, and that would be paid at a fixed period of time. 

Mr. John Smith wanted a thousand dollars against security. Mr,- 
Smith would ^ve his note for 90 days, bearing 6-percent interest, 
with the security attached. And the banker would thereupon enter 
on the books of the bank a credit to John Smith, precisely as if John 
Smith had paid into the bank that amount in gold dollars, or in legal- 
tender notes. 

The banker and John Smith combined in this way to create a 
demand bank deposit subject to check. 

When John Smith made this contract with the bank, the bank 
agreed to pay his checks on demand in legal tender to the extent of 
the loan. Here was the manufacture of money in the form of a 
demand bank deposit by John Smith and the bank. Thus pubho 
and private assets were monetized by the bank. 

Not only was money thus created by the bank and its depositors, 
but the money supply of the country was contracted when the loan 
was paid off. 

When John Smith sold his cattle for somebody else's money, hei 
received a check from the buyer of. the cattle on a bank. He de- 
livered the check to his banker and was given credit for it. He then 
paid the loans he had made, with interest, out of the demand deposit 
created by the check received for the cattle he had sold. Thus John 
Smith canceled the amount of money he had previously received and 
also transferred to the banker the interest on his loan. This interest 
was taken out of the demand deposit and transferred to the bank as 
a profit. Such money, as profit, withdrawn from the demand bank 
deposits, was a further cancelation of demand deposits, and a trans- 
fer of such demand deposits to the banker as an investment, and 
became a part of his undivided profits or capital. 

It matters not how many times you multiply this transacitioh. 
The principles involved are the same. The bank and the borrower 
create money in the form of demand bank deposits subject to check. 
They destroy the demand deposits thus created when the loan 13 
paid. The banks, therefore, through this process expand money and 
contract money. 

When a bank buys $1,000 of Govemment'bonds/it creates $1,000. 
of demand deposits to pay for the bonds, which the Qoverhment putii. 



16 



NA*nONAL BCONOMY Al«> THE BANKING SYSTEM 



into circulation by spending. This is an increase of the money 

When the banks sell the $1,000 of bonds to their own depositors^ 
$1,000 of demand deposits is transferred from the depositors to the 
banks ais a cash asset which the banks can then lend to their customers 
at 6 percent without expanding their deposits any further. 

This means that the banks can buy a 3 percent Government bond, 
sell the b6nd to demand bank depositors and loan the money re- 
ceived at 6 percent to other customers. This asset then reappears 
Under the head of loans. It first appeared as an investment in bonds. 
Then it retired a Hke amount of demand deposits by adding such 
deposits to the assets of the banks in so-called cash on hand. That 
cash, when loaned, reappeared under the head of loans. Thus the 
net effect is to transfer. a loan to the Government into a loan to 
citizens at a higher rate of interest. 

It is in this manner that credit is rendered more unstable, because 
when the banks become frightened, they call the loans of the citizen, 
whereas, if they had kept the Government bonds, they would not 
recall the loan to the Government. 

When the Government sells baby bonds on a large scale to the 
people it has the effect of drying up the circulating medium, in the 
form of demand bank^ deposits, by converting such small individual 
demand deposits into individual investments m a nonUquid security. 
It becomes a savings account in lieu of liquid money available as a 
medium of exchange. 

It is of imj)ortance for students to notice the manner in which this 
is done. It illustrates the manner in which money created can be 
immediately retired or canceled. 



THE RELATIVE VOLUME OP CURRENCY AND CHECK MONEY 

It is of importance to observe the relative volume of currency, 
outside of the Treasury in circulation, and the volume of check money 
in circulation. 

The total amount of currency outside of the Treasury for each year 
from the years 1926 to 1936 is as follows; 



Total currency in circulation 



1926. 
1927. 
1928. 
1929. 
1930. 
1931. 



Cut' 

. 46 

- 46 

. 4 5 

. 4 5 

. 4 2 

_ 4 6 



1932. 
1933. 
1934. 
1935. 
1936. 



Our- 
rencpt 

- 5.4 
. 5.4 

- 5.4 
. 5.6 
. 6.2 



1 Indicat«t billions snd decimals thereof. 

Soturce: Board ot OoT«mon of the Federal Reserve System. 

The volume of currency, as heretofore pointed out, in actual circu- 
lation by the people as pocket money, probably does not exceed 
one-half of the total amount outside of the Treasury. 

So that $3,000,000,000 is probably a maximum estimate at present 
of the currency in actual circulation as pocket money, including 
that which is hoarded. This money is largely received for wages 
and salaries, being paid daily, weeldy, and monthly. It has been 



NATIONAL ECONOMY AND IBBi BANKING STSTBU 



w 



estimated that there is an average tuni^ver of about 26 ti^(ior;iN^ 
annum for currency. It is estimated, on the other hand; that iUp 
tum-over of check money is normally much more rapid. The total 
volume of such check money for the years 1926 to date, and the total 
demand deposits as of June 30 for each of these years, will indicate 
the relative speed of the tum*over on the average: 







Average 


turnover of demand deposit 


8 






Year 


Volume of 
demand 
deposits • 


Volume of 

check 

money » 


Average 
turn- 
over 


Year 


Volume of 
demand 
deposits > 


Volume of 

check 

money » 


Avvngn 
turn- 
over 


1926 


21.6 
22.2 
22.3 
22.6 
21.8 
19.9 
16.6 


84S 
920 
1,074 
1,230 
900 
660 
460 


39 
41 
48 
54 
41 
33 
. 28 


1933 


14.4 
16.6 
20.6 
23.8 
25.2 
24.3 


480 

470 
630 
611 
637 


3ft 


1927. 


1934- 


39 


1928 


1936...^- 

1936 


25 


1929 


2» 


1930 


1937 , 


36 


1931 


1938- 


2> 


1932 











1 Indicates billions and decimals thereof. 
• Preliminary. 

Source: Board of Oovemors of the Federal Reserve System. 

It must be remembered, however, that in periods of depression a 
large part of the demand bank deposits are hoarded for future invest- 
ment. Therefore, the turn-over of the entire demand deposits at 
such a time is a theoretical fiction. It is probable that at the present 
time, when the check turn-over is estimated at a total annual volume 
of $530,000,000,000 that less than $11, 000,000,000 is so employed, and 
that this $11,000,000,000 has an actual turnover of 50 times per annum. 

The total volume of money employed as a medium of exchangib 
consists of credit and currency. It was for this reason that those 
who wished to increase the purchasing power of monev and diminish 
the price of the products and services of labor, conaucted an open 
campaign in 1920 by declaring their purpose to make a "persistent 
attack on the high cost of living by the courageous and intelligent 
deflation of overexpanded credit and currency." Their conception 
was that if the dollar could buy more it would be better for the people 
who had dollars to spend. They were convinced that by the contrac- 
tion of credit and currency the dollar would increase m purchasing 
power. 

This economic theory was completely demonstrated by what took 
place. The Federal Reserve banks and the member banks con- 
tracted credit and currency on a large scale, with the result that the 
price level, representing the volume of money employed in the pur- 
chase of commodities in the wholesale markets, fell from an index iii 
May 1920 of 167 to 93 by June 1921. The index of the purchasing 
power of the dollar, which is always in inverse ratio to the price level^ 
or all-commodity index, steadily rose from 60 in May 1920, to 107 ill 
June 1921. Naturally, as the volume of credit and currency contracta^ 
the purchasing power of the dollar would rise because of the scarcity 
created in dollars. It was merely a |)roof of the well-established 
axiom that the exchange value of anything depends upon the law of 
supply and demand. 

The volume of currency in circulation outside of the Treaauiy is- 
naturally, as a matter of statistics, comparatively uniform, Only 



IS 



NATIONAL ECONOMY AND THE BANKING SYSTEM 



inereasmg to the extent of aa increasing demand by a growing popula- 
tion. Occasionally thei*6 arises an extraordinary ; demand for cur- 
rency, such as m the first quarter of 1933. With the failure of many 
banks/ there was a sudden expansion of Federal Reserve notes due 
to the demand for currency by frightened bank depositors. At this 
time the cxirrency suddenly increased about $2,000,000,000. It 
afterward returned, in large part, to the Federal Reserve banks when 
the fear of depositors had ceased, because of the insurance of bank 
deposits. 

In 1932, as heretofore stated, the people protected themselves 
against the hoarding of currency by manufacturing scrip money, 
which was not authorized by law, but which served as a substitute 
for currency. 

Check money, or bank credit in the form of demand bank deposits, 
goes through great fluctuations, depending upon the condition of 
credit in the banks. An illustration of these violent changes is best 
clranonstrated by tlie estimate of the volume of check money employed 
from 1926 to 1938. 

In comparison with the amount of currency in circulation outside 
of the Treasury, the following table presents th^ volume of check 
money employed from 1926 to 1938. 

Relative volume of currency and check money 



Year 


Checks > 


Curreocy' 


Year 


Checks » 


Currency' 


1030 


845 
920 
1,074 
1,230 
900 
660 
450 


4.6 
4.6 
4.6 
4.5 
4.2 
4.5 
5 4 


1933 


430 
470 
630 
611 
637 
530 


6.4 


1927 


1934 


5.4 


1V28 


1935 


5.6 


1929 


1938 


6.2 


1980 


1937 


6.5 


1931 


1938 


6.8 


1932 











' Indicated billions and decimals thereof. 

Source: Board of Governors of the Federal Reserve System. 

A portion of this currencjr in the pockets of the people also has a 
turn-over amounting to possibly 26 times per annum. ^ 

Chapter VI 

THE NECESSITY FOR STABLE MONEY 

The necessity for stable money has long been recognized as of 
supreme importance in giving stability to the value of labor and 
property and establishing justice between debtor and creditor. 

Since money is a measure of value, obviously, to change this meas- 
ure (the purchasing power of the dollar) would mean that there 
would be no stability in the measure of the value due to a creditor 
by a debtor. The creditor is entitled to be repaid in a dollar of the 
«ame purchasing power that he loaned and no more. And the 
<lebtor should not be required to pay his debt in a dollar of greater 
purchasing power than the dollar he borrowed. 

When tne Government issued its bonds for the prosecution of the 
World War and the purchasing power of the dollar fell to an index 
of 60 in May 1920, such bonds ought not injustice to be required to 
be liquidated in dollars whose purchasing power is an index of 130, 



NATIONAL ECONOMY AND THE BANKING SYSTEM 



w 



fiksia December 1938. This truth is thorou^ily well under^tcN)^ b^ 
all informed economists, but the diflBiculty in aocompliBhing the 
objective of a money which shall have a uniform, debt-payii^, pui^ 
chasing power from one generation to another has been a lack of 
informed public opinion. 

There has been a failure on the part of the orthodox economist, 
who relies upon tradition, to realize the part played in the measuring^ 
power of money by the modern substitute for currency, check money. 

The Stable Money Asjsociation has been under the leadership of some 
of the greatest leaders in finance and industry. For example, Owen 

D. Youn^, chairman, General Electric Co. ; M. C, Rorty, vice-president, 
International Telephone & Telegraph Co. ; Heniy A. Wallace, Secretary 
of Agriculture; Bernard M. Baruch, financier; /ohn J. Raskob, former 
chairman, Democratic National Committee; Alfred P. Sloan, Jn, 
president, General Motors; John W. Davis, former Democratic candi- 
date for President; Elihu Root, former Secretary of State and of War; 
Nicholas Murray Butler, president, Columbia University; Otto H. 
Kahn, president, Kuhn, Loeb, & Co.; Matthew WoU, president, 
Union Labor Life Insurance Co.; Irving Fisher, professor emeritus of 
economics, Yale; Charles Evans Hughes, Chief Justice, United States 
Supreme Court; John L. Lewis, president. United Mine Workers of 
America; I-.ouis J. Taber, national master. National Grange; Gumey 

E. Newlm, president, American Bar Association. 

A more complete list of these men will be found in the appendix. 



THE EVILS OF UNSTABLE MONEY 

When a farmer borrows 100 bushels of wheat, he can repay it with 
100 bushels of wheat. But if he borrows $100, he might easily find 
himself compelled to sell twice as many bushels of wheat with which 
to obtain the $100 for the repayment of the debt. 

There have been 27 distinct periods in the history of the United 
States during which a serious change took place in the purchasing- 
power of money, always due to the increase or decrease of the volume 
of money. The most violent example perhaps in recent years was^ 
what took place in 1921 and in 1929-32. 

The following table shows some of the effects on a selected group 
of the more prominent farm commodities of the expansion and con- 
traction of the purchasing power of money. 

Index numhera of whokaale prices for cotton, corn, wheat, and composite group of nil 

farm products for selected periods 



Date 



May 1920 , 

September 1920 

January 1921 ^ 

May 1921 

July 1921. 

July 1929 , 

December 1929 

July 1930 

Averafce for year 1936 

Low of 1932 

' June. » D6oember 

Source: Bureau of Labor Statistics. 



Cotton, 


Corn, con- 


Wheat, No. 
2 Rod Win. 


Middling, 


tract 


per 


grades, per 
bushel, 


ter, per 


pound, 


bushel. 


New York 


Chicago 


Chicago 


235.8 


262.9 


192.8 


171.6 


173.3 


161.6 


95.3 


89.9 


127.2 


73.8 


81.2 


101.7 


70.5 


80.9 


79.7 


106.0 


131.1 


86.6 


98.6 


118.6 


84.3 


75.1 


107.2 


57.7 


69.1 


111. 2 


71.1 


180.1 


• 80.6 


•20.9 



Group of 
all farm . 
produce 



169.8. 
143. »• 
ioi;«- 

83.1 
86. 6^ 

107.6. 

101. » 
88.1 

8a» 

<44.1 



1 Noyember snd December. 



20 NATIONAL ECONOMY AND THE BAKKINQ SYSTEM 

Undor thoTO conditions the fanners of the country have universally 
suffer)^ and nnliions of theni Im 

The fl^ctuation in the purchasing i)Ower of money, however, has 
been much greater in the security exchanges, where prices are not 
only affectedby the abundance and scarcity of money, but also by the 
scarcity and abundance of stocks for sale. In 1929 the common and 
preferred stocks listed on the New York Stock exchange reached a 
high market price of $89,000,000,000. By June 1932, they had fallen 
to a low of $12,000,000,000. This demonstrates that the purchasing 
power of the dollar in the stock market increased over 600 percent 
Deoause of the scarcity of money, or bank credit, and the super- 
abundance of stocks for sale at the bottom of a depression. 

The same thin^ is manifest in the real estate market, particularly 
on real estate which has no income-producing value but which is held 
merely for investment. Here the change is often very great. The 
dollar will sometimes buy vacant real estate in the towns for the taxes 
and will buy imfeultivated lands for one-fifth to one-tenth of its 
previous market price. 

So, we see that the evils of a fluctuation in the way of an expansion 
or a contraction manifest themselves in all of the products of human 
labor and other forms of property. But the evil is far worse when 
money rises in value because of scarcity, because it then results, as at 
present, in 10 or 12 million people being thrown out of work and 
unable to sell their labor at any price, and who are compelled to rely 
upon their sayings, or upon public relief and private charity and who 
suffer from being underfed, underdo thed, and undersheltered. 

Such periods of severe change in the value of money result not only 
in the unemployment of millions of people, but it has the effect of 
lowering the health and morale of the people by millions and causing 
them to resort to criminal acts as a means of affording themselves 
temporary rehef . 

Tne consequences, broadly, of the change in the purchasing power 
of money ,win be more clearly seen from the monetary table for the 
years 1943 to 1936. (See appendix.) 

For a much more detailecl description of the harm that money does 
to the economy of a country, read The Money Illusion by Irving Fisher 
professor emeritus of economics at Yale University. 

THE NATURAL INSTABILITY OF OUR PRESENT-DAY CHECK MONEY 

Our present check money is by its own nature unstable, as money, 
because the volume is not under any control. 

Our modern check money is created by debt. When a man borrows 
$1,000 from the bank, he creates a debt with the bank. 

In this manner a thousand dollars of money in the form of a demand 
bank deposit is created, as has been explained. Until this debt is 
paid this deposit circulates as money, being transferred from one 
depositor to another depositor. It is immaterial if a person receiving 
a check on this deposit puts the check with another bank. That 
would merely be transferring the money from one bank to another 
bank. The money, as a demand bank deposit, continues to circulate 
until the debt is paid. 

On June 30, 1929, the banks had $41,600,000,000 of such loans 
outstanding. 



NAl?IONAL BSOOKOirr AND Tra BAMXINO StVTMf ^ 

III additioa to imyate loans thtm made by^^t^^ banks^ tbc^ ^W 
•create money when they buy the bonds of the United States Qovem* 
ment, or of any State, county, city, or corporation in tint United 
States. _.:,.,,. ■ , ., . ! 

When the banks contracted their loans of $41,000,000,000 by 
Jime 30, 1932, to some $20,000,000,000, they contracted the money 
supply correspondingly; so that the demana bank deposits and the 
time deposits of the banks fell in 3 years, from June 30, 1929, to ^une 
30, 1932, by approxiaiately the same amount. Demand bank depoaitB 
therefore fell from $24^000,000,000 to about $14,000,000,000, and 
the time deposits were duninished by about $10,000,000,000, the time 
deposits bemg transferred to the banker as demand deposits, and 
then the demand deposits were employed to pay the debts to the 
banks. In this manner, many thousands of banks, moved by fear. 
caused a shrinkage in demand bank deposits and time deposits or 
$20,000,000,000. This caused the shrinkage of the volume of check 
money from $1,230,000,000,000 in 1929 to $460,000,000,000 in 1932, 
and caused, at the same time, the increased purchasing power of 
money and the decreased exchange value of property, causing uni- 
versal bankruptcy. 

It should be clear, therefore, that when the money supply is based 
upon loans made by privately owned banks and is subject to undue 
expansion through overoptunism, or to undue contraction through 
pessimism, such money is, by its nature, unstable and dangerous to 
the welfare of all of the people — not only the poor, but also often ruinous 
to the rich. 

Money being also created by the Government through the sale of its 
bonds, and by States ' counties, cities, and corporations, the volume 
of money is affected by such debts and is made by natiu-e unstable. 
This unstability will last until the powers of the Government are used 
to render money stable by exercising the constitutional power and 
<iuty of the United States exclusively to create the money which the 
people need as a medium of exchange and to regulate the volume and 
value. 

It is known that under comparatively stable money, the nation^ 
production increases at the rate of 4 percent per annum, and except 
for these depressions we should now have a normal production of Over 
50 percent more than it was in 1926. But the decrease which actually 
took place during the last ^anic of 1929-32 amounts to a net loss of 
$164,000,000,000 in the national income without counting the loss of 
the 4-percent increase we should have had. 

THE MONEY ILLUSION 

People have a general illusion that money is stable and that prop- 
erty is unstable because it rises and falls in price; whereas, it is money 
which falls and rises in purchasing power because of scarcity or 
abundance. They do not realize that when all commodities and all 
forms of property fall in value, it is not because the intrinsic value of 
these properties and commodities change, but because the money, 
with which they are all measured, changes in voliime and becomes 
scarcer or more abundant. 

When the commodities in the wholesale markets in 1933 required 
40 percent less money to be bought than ia 1929, it was because the 



jg mMmcmi^ msmoittAm^Tsm banking sysi'bm 

tB©ii0yfitti>p!y irad contra everything, 

the fitearcity of inone^ value of evervthing to fall. When 

the liibiiey supply is more abundant, or doubles, and the volume of 
commodities is uinchanged, the exchange value in money of all com- 
moditibs and properties doubles. 

While this truth is recognized by all informed students, neverthe- 
less the illusion persists with a great body of the people that it is not 
the money that changes in value but the property. 

Only an informed public opinion can change this erroneous think- 
ing. It takes time to overcome such a world-wide error. It took 
many decades for the people of the world to learn that the sun did 
not revolve around the world, but that the world turned on its own 
axis and revolved around the sun. 

Chapter VII 

THE ORTHODOX TRADITIONAL THEORY OP MONEY 

Prior to the twentieth century it was the traditional theory of 
money, held by orthodox professors of political economy, that gold 
was money provided by Nature and that nothing else was money. 
This opinion was expressed very clearly by the ^reat financier, J. P. 
Morgan, in December 1912, in answering a question of Samuel Unter- 
myer during the Pujo investigation. Mr. Morgan said, '^Gold is 
money and nothing else is." 

It was believed that gold, because of its stable volume, was a more 
stable measure of value than anything known to the human race. 
There was always a demand for it because of its beauty, malleability, 
ductility, resistance to corrosion, handy size in relation to value, etc. 
It was, therefore, a convenient measure of value. It was authorized 
to be stamped by the Congress of the United States in 1792 as United 
States money, and it continued to serve as legal tender by weight until 
1934. 

It was purchased by the Treasury at a fixed value by weight when 
minted. On March 14, 1900, the Gold Standard Act was passed, 
declaring the dollar to be 25.8 troy grains, nine-tenths fine. 

Gold was used domestically by nearlv all the leading nations of the 
world prior to the World War and is still used as a basis of international 
exchange. 

It was the orthodox theory, therefore, that gold had been made by 
law the standard measure of value and that currency, which was 
redeemable in gold, and silver certificates convertible into gold, and 
fractional coins made legal tender by statute in limited amounts, 
comprised money in the United States and no substitute for money, 
such as a check, could properly be called money. Upon this premise, 
that money consisted of legalized currency and nothing else, the 
orthodox traditional economists pointed out with justice that such 
money (statutory currency) did not fluctuate in such an amount as 
to account for the violent changes which took place in the market 
price of commodities and of stocks on the security exchanges. 

In 1933 the Congress passed an act making all currency legal tender, 
later retiring the national bank notes as money and demonetizing 
gold in domestic circulation. 

Upon the premise that gold and legalized currency alone consti- 
tuted money, the orthodox economist denied the quantitative theory 



NATIONAL S»:X>NOMr AXO(t£HKBAI^^ 

which holds that the purehasmg power of money is deterttiiix^d V|^ 
its volume. They held that the overproduction o( goods catisiiditlii 
violent fluctuations in the iiiiarket price of <M)iiimO(htie8, 1^«^ held 
that gambling on the stock markets accounted for the change m ilie 
prices of securities. THey held that the lack of pubMc ooMdenoe 
caused the changes in miarket prices. 

There are manv other theories, more or le^ fanciful/ lU'ged by other 
economists which have been quite adequately answered by I^f. 
Irving Fisher in his book Booms and Depressions. It is sufficient for 
this exposition to state that the orthodox theory denies the quantita- 
tive theory of money on the premise that nothing is money except 
gold, or currency redeemable in gold. 

Economists holding this view have therefore insisted on a return 
to the gold standard of 1900^ and have denounced the demonetization 
of gold in domestic circulation, and the act of Congress making un- 
lawful contracts payable in dollars of a standard weight of gold, and 
providing that all such contracts can be liquidated in lawful money. 

Students should remember that inoney is anything which by con- 
ventional use is employed as a medium of exchange and measure of 
value, and that a recognition of this truth completely solves the 
question of what makes the value of money. A knowledge of the 
meaning of money therefore enables the student to demonstrate 
that money is subject to the everlasting law of supply and demand 
and that its value always depends upon the supply of money in 
relation to the demand for money. 

THE QUANTITATIVE THEORY OF MONEY 

The quantitative theory of money is simply that the value of money 
depends upon the supply of, and demand for, money. 

The colossal demand for money is well known. It takes $12,000,- 
000,000 per annum to pay the interest charges on borrowed money. 
It takes $14,000,000,000 of money to pay the taxes of the United 
States, the States, and their subdivisions. It took $846,000,000,000 of 
check money to meet the requirements Of the American people in 1926, 
and if their growth had been normal from that time to this, it would 
have required approxiinately an increase of probably 4 percent per 
annum. This increase is estimated variously as from 3 to 6 percent 
in America, yet in Great Britain, under managed money. Sir K^inald 
McKenna reported in February 1938 that the increase of the mdus- 
trial production of Great Bri tarn had been 60 percent in 6 years. 

The supply of money in the United States, based upon debt, has 
suffered violent fluctuations, as heretofore set forth. At the present 
time, December 1938, the volume of check money is estimated to be 
at the rate of $530^00,000,000 per annum. This is far less than hall 
of what it was in 1929. 

Modem students of monetary science now know with certainty that 
the value of money depends upon the supply of money in relation to 
the demand for money. Gustav Cassel, professor of political economy 
at the University of Stockholm, in his lectures on Post War Monetary 
Stabilization before the University of Columbia and the University ol 
Chicago, sets forth these correct principles. His lectures are pub- 
lished in book form by the Columbia University Press. 



24 nAmonAL Movout Aim ths bankikg srcrrau 

^FlM Tiklaw ol ft dutteaoy to MsentlftUy^ determined by tbe searoity in the suppTy 

; It io^k nwny y^i^ of biird work' t« get people to understand that the only 
tibliDg tliat has r^l importance for the value of a currency is the total supply of 
the ineto^ of pajrtnent (p. 3). 

The gold standard is nothing else than a paper standard^ the value of which 
is entirely dependent upon the way in which the supply of the means of payment 
iariMulated Cp. 4). 

The purchasing power of money is exclusively dependent on the scarcity in the 
supply of the means of payment (p. 42). 

The value of money cannot possibly be dependent on anything but the supply 
oi money in relation to the demand for money (pp. 01-92). 

Cassel uses the term "means of payment" to include currency and 
checks. 

To illustrate these truths^ Professor Cassel quotes the experience 
of the leading European nations. France^ for example, increased the 
voltmle of the French franc five times, with the result that the pur- 
chasing power of the franc fell to one-fifth of what it had been. 

Italy expanded ^the hra four times, with the result that the lira 
fell in purchasing power to one-fourth of what it had been. 

Our own experience in the United States has completely demonstra- 
ted the truth of the quantitative theory. 

The supply of money, as a medium of exchange, consists only of the 
Yolume of money so emplojred, and does not consist of currency 
hoarded, or currency in the tills of banks and business houses; or of 
demand deposits which are hoarded and held inactive and dormant 
as reserves, or for future investment. This must be remembered in 
applying the quantitative theory. 

Chapter VIII 

THE DOLLAR INDEX AND THE PRICE LEVEL 

For 40 years the Department of Labor has been endeavoring to 
establish the dollar index to show the relative purchasing power of 
the dollar in the primary wholesale markets. To accomplish this, 
they selected 784 commodities in 1926 and established the volume of 
each commodity for the vears 1923 and 1926, taking the mean average 
of these 2 years. This fixed volume of each commodity has remained 
substantially unchanged up to this date (1938). 

In 1926 the average price of each commodity was ascertained by 
taking the weekly market price for 62 weeks, adding up the numbers 
and mviding by 62, thus getting the average price for the year 1926 
of the individual commodity. This average market price for each 
commodity was multiplied by the units in the fixed volume of such 
commodity on the mean average of 1923 and 1925. Thus was ascer- 
tained the* total amount of dollars received for the fixed volume of 
such commodity when multiplied by the average price for the year 
1926. Thus was ascertained the number of dollars required to buy the 
fixed volume of such commodity. The products in dollars for each of 
the 784 commodities were then added up. It was found, by this 

giroeesfl, that the total volume of dollars required to buy the total 
xed volume of the 784 commodities was 64.7 billion dollars. 
The Department then declared this volume of dollars to represent 
Uie volume of money required to buy the volume of commodities 
listed. And for purposes of comparison with future years used an 



NATIONAL SOONOMT Aim THB^IftAiqaN^ 2t 

inito o! 100 to r^i«8«ht the piioe i0Td dl 1926 and ihB knimc^iiiM 

Surchasing poWer of money in tlie wholesale markets loir 1(^^ 
ibyioudy^ following the same methods of x^culatton for 1027| when 
it was ascertained that the total volume of money required to buj 
the fixed yolume of commodities was 6 percent lees than 54^7 biUbn 
dollars^ the index of the price level would fall 6 percent/ and ih» 
dollar mdex would rise 6 percent. This would demonstrato that the 
purchasing power of money in relation to commodities sold in the 
wholesale markets had increased 6 percent in relation to a fixed 
volume of the commodities. 

The dollar index and the price-level index were exclusively con- 
cerned with the actual purchasing power of money in the primary 
wholesale markets. They did not concern themselves with the causes 
of the changes in the selling price of commodities. These indexes 
dealt merely with the question of price, regardless of the cause of the 
price. 

The dollar index and the price-level index were always in inverse 
ratio to each other. When the volume of money required to buy the 
fixed volume of commodities was ascertained, a comparison was made 
with this volume of money and the $64,700,000,000. In that way 
the index of the price level was obtained. When the index of the 
price level was obtained, such as 94 in 1927, the index of the purchasing 
power of money was ascertained by dividing 10.000 by 94 which gave 
the purchasing power of the dollar in the wholesale markets at 106. 

It was found for the year 1929 that the amount of money received 
for the fixed volume of commodities was 5 percent less than the amount 
of money received in 1926 for the same volume of commodities. 
Therefore, the index of the price level was 96 and the dollar index was 
105. 

In May 1938 it was found that the amount of money required to 
buy the fixed volume of commodities was 78 percefit of $64,700|000|000 
and the dollar index was 128, showing that the dollars were buying 
28 percent more of the fixed volume of goods than in 1926. 

Since it took only 78 percent of the money required in 1926 to buy 
the same fixed volume of goods, it not only showed the increased pur- 
chasing power of money m the purchase of such goods, but another 
very important factor had entered into the question of the purchasing 
power of money, so arrived at. 

HOW PRICES ARE INFLUENCEO 

The prices in the wholesale primary markets are not only influenced 
by the volume of money but are similarly influenced by tlie volume of 
commodities. The dollar index and the price-level index pay no 
attention whatever to the factor of the volume of commodities. The 
volume of commodities, with the rise and fall in the volume of com- . 
modities, is shown hy an entirely different index — the index of indus- 
trial production, which shows the increase or decrease in the volume 
of products (elsewhere explained). 

if the volume of products should decrease 26 percent (the money 
supply unchanging) the market price of such commodities would in- 
crease by an inverse ratio of 33 percent.* 

I For the reason that since thrae-fourths of the volmna woakl incraaaa (UM^ird In prioa, tha tommm a( 
ona-thlrd in prica would ralsa tha ntunbar of doUMt to tha aama TOluzoa, or up to 100 pareant of aomal. 
aaunUog tha moaay aupply arsilabla had not diangad. 



26 NATI01?ia< iMX>NOMY AND THB BAICKINO BTSTBM 

It mrould reqwe 54.7 billidii doUaro to purchase three^fonrtbs of the 
Toltitne bj|.yi])i[ im increased ^ ^^^ of one-third. But the 

actual index of the price level would show a rise of 33K percent and 
the dollar index would be 75. The two multiplied together would 
make 10,000. 

In other words, the purchasing power of money in terms of such 
commodities would fall 25 percent and the index of the average com- 
modity price would rise 33 K percent. 

If, however,, with a decrease of 26 percent in the commodities, 
there was a decrease of 26 percent in the volume of money, the pur- 
chasing power of money would remain unchanged in terms of com- 
modities, because the volume of commodities and the volume of 
money fell in the same ratio. _If the volume of commodities increased 
60 percent and the volume of money increased 60 percent, there 
would be no change in the price level or the dollar index, as the dollars 
would buy the same volume of commodities as before. 

If, therefore, the vohmae of commodities increased 5, 10, or 16 
percent, the volume of money should increase 5, 10, or 16 percent in 
order to preserve a dollar of the same purchasing power in terms of 
commodities. 

In 1929 the index of industrial production rose on an average of 
19 percent above the 1923-26 average, but the volume of money in 
the wholesale markets did not rise 19 percent. It rose less than 19 
percent. If it had risen 19 percent, the price level and the dollar 
index would have remained at 100, but the price level fell 6 percent 
to 96 and the dollar index rose to 106, showing that the volume of 
money did not correspond with the increase in the volume of com- 
modities. Therefore, the purchasing power of money increased 5 
percent for the year 1929. 

In May 1938 the price-level index was 78 and the dollar index 128, 
showing that the dollar was buying 28 percent more goods than in 
1926^ notwithstanding the vital fact that the index of industrial pro- 
duction in May 1938 was 76. In other words, the dollar was buying 
28 percent more goods when the ^oods were nearly one-fourth less in 
volume. When the goods were diminished in volume to 76 percent of 
normal, the market price of such goods should have increased by 
inverse ratio, or 3lK percent more than normal. Since the goods hy 
virtue of their scarcity were worth 31M percent more than normal, it is 
obvious that the dollar was buying 28 percent more than normal at a 
time in 1938 when the goods were theoretically worth 31 X percent 
more than normal. In other words, the volume of money was buying 
28 percent more in volume of goods worth theoretically 131 K Jn market 
value. 

This is a substantial physical fact and can only be accounted for by 
a greater contraction m the money supply than would be super- 
ficially indicated by the price level of 78, or Ihe dollar index of 128. 

The actual volume of money available, therefore, in the wholesale 
markets in proportion to the goods was approximately 31 percent less 
than 78 percent of the normal, or a contraction of the money supply to 
a little over 50 percent of the normal supply of money in relation to 
the normal supply of commodities as fixed in the year 1926. 

The dollar mdex, therefore, should be about 170, in terms of com- 
modities to represent actual rise in purchasing power. 

In 1929 the volume of check monejr debited was 1,230 billion dollars 
but in December 1938 it was approximately at the rate of 630 billion 



NATIONA3L Rocmcmt ANp trm BA^ Bxwmm jn 

dollars yearly, n contr«<etion <^ the Tolume of check money in t^ 
United States of more than half . This confirms, by actual statiat^eikl 
facts, that there had be^n ibi the United States a contraction of check 
money by over half from 1929. 

When the ptirchasln^ power of the dollar increaded in termiol 
stocks over 600 percent from 1929 to 1933, }t did not signify iJiat^thi 
volume of money had fallen to ono-«ixth of what it was, l:^att8e in ihal 
case, along with the shrinkage of check mone^ to one-third, there came 
on the market a huge volume of stock certilicates which distreafled 
owners of such stock parted with either from fear of further fall, ot 
from necessity, because such stocks had been bought with bank loanA 
that could no longer be carried. The oversupply of stock certificates 
therefore, in the market had the effect of cheapening such stocks at a 
time when the contraction of the money supply expanded the purchaa^ 
ing power of money and further cheapened the stocks in terms of 
money. 

The same principle applies in regard to real estate.' When the 
depression came on, bankruptcies ensued, hundreds of thousands Of 
shops were closed and offered for rental. The surplus of such shopi 
and stores was available on the market in the depression when they 
were producing^ no income and were subject to actual loss through 
taxes, insurance, maintenance, etc. 

The dollar index does not deal with these subjects which indicate 
the purchasing power of money in the fields of real estate and stock$i 
The dollar index concerns itself exclusively with prices in the primary 
wholesale markets on 784 commodities, used up to 1938. The number 
has been expanded to 813 since January 1, 1938. it is also true that 
in making up the price level and the dollar index, in lieu of the fixed 
volume oT commodities established by the mean average of the years 
1923-26, the Department of Labor took the mean average of the 
years 1929-31 as a new basis. The new basis, however, made no 
substantial differen<e in the volume of money required to buy the 
784 commodities (now 813) because the index of industrial production 
was 119 in 1929 and 81 in 1931, makmg a mean average of 100, and 
producing therefore an average of about 65 billion dollars which is 
within a fraction of 1 percent of 64.7 billion dollars, used in 1923-25. 

Tn considering, therefore, the subject of the dollar index and the 
price level index, it should be obvious that they clearly make manifest 
the extreme manner in which the volume of money available in com- 
merce and industry has been contracted, and that the remedy must 
be found in expanding the money supply with intelligent care so as to 
restore the price-level index to par, and keep it at par by expanding 
the volume of money as the index of industrial production can be made 
to ej^pand under a system of regulating the value of money by regulat- 
ing the volume of money in circulation. 

In May 1938, theindex of industrial production fell to an extreme 
low point and rapidly rose to 90 by October. This index was seriously 
influenced by the expaftslim of money through the expenditure of the 
Government and the change of policy which went into effect in June 
1938. Moreover, in April 1937, when the index of industrial produe- 
tion was 118, there were on hand substantial inventories which were 
gradually reduced by June 1938. The inventories being low at that 
time, production was stitnulatexl by that circumstance. This shuuld 
not be overlooked in considering this question. 

1233.'J8~39 .1 



^ NATIONAL BO0NOlft AND THB BANKXNa SYSTBM 



<l«%«MiiA*««* #«»4«T««'f 



Tfaense and fall of the commoditids Ikted is hofmally and generally 
due to the rise and fall in the money supply. There are some com- 
modities that escape this normal rule for the reasdn that commodities 
like copper, lead, steel, tin, and zinc are controlled by. monopoHes 
that can arbitrarily fix the price. Thus the price will not go down 
because of a shortage of money, nor will such commodities go up in 
price, necessarily, l^cause of an expansion of money. But the ex- 
pansion of nioney lays a foundation by which commodities controlled 
by monopolies not only can be raised in price correspondingly with 
the rise in other commodities, but it often happens, as in the case of 
copper and lead, that when business conditions substantially improve 
andf the demand for building purposes requires a larger volume of 
copper and lead, the managers of the monopoly take advantage of 
t^e conditions to arbitrarily raise their prices far above the average 
rise of other commodities. In this way they have a tendency to dis- 
courage building and to slow down the processes of a more favorable 
market. 

As elsewhere stated, the remedy for the arbitrary raisinjg of the 
prices of commodities, such as copper, lead, tin, steel, and zmc, does 
not lie within the scope of monetary control, but the regulation of 
sujoh unfair prices fixed upon the public must be left to the Congress 
wh^n passing laws to regulate the monopolies and unfair practices by 
them, or practices against the public interest. 

It has been urg^ by some economists that the depression of 
1937-38 was due to the arbitrary raising of the price of copper and 
other monopoly products. But copper and the products oi copper, 
taken as a whole, only comprise about 1 percent of the average values 
01 the b'sted conamodities on which the price level is based. The 
effect of an arbitrary rise in such commodities would be to arbitrarily 
increase, by an extremely small percentage, the price level without 
such an increase being based on an increase in the money supply. 
If the increase were due to an increase of the money supply, it would 
mean that the increase would be accompanied by an increase in the 
volume of production and employment, whereas the arbitrary in- 
crease has no such foundation. When the price of copper was raised 
business was active and continued to be active during January, 
February, March, April, and May and the index of industrial produc- 
tion rose until March and only began to fall as the marketing of 
securities progressed and the hoarding of the money received from the 
sale of such securities was carried on on a^raduafly increasing scale, 
until the crash occurred in September. This has been elsewhere fully 
wplained. 

In short, the so-called disequilibrium of prices is not a monetary 
problem, and even regardless of arbitrary fixed prices by monopoly, 
the disequilibrium (so-called) of wholesale prices is necessarily due 
to the larger or smaller supply of individual commodities in relation 
to the demand for such individual commodities. It is only the value 
of all of the listed conmiodities that indicates the changes in the 
purchasing power and in the supply of money. 



KATIONAJL BOOWOMT AN]> $H1B BANKmO STfiOmi 
TRB YOLUlCKlorjMOHiT AND THS PBICB LBYBL 

Under the law of supply and deihaiid, the demand for moni^ tii 
pay for the 784 listed commodities manufactured in this country wlQ 
depend upon the Supply of money ayailaHei in the ^holeisale com- 
modity markets. The demand for money in the wholesale commodity 
markets is by no means the only demand for money. Money may m 
expanded in speculation in the security markets without necessarily 
affecting the money employed in normal trade in the commodity 
markets. ' 

This took place in the years 1924 to 1930, inclusive, when there wa^ 
a great expansion in the number of stock certificates sold to ^^ 
American people. There were sold, and Hsted on the stock exchangesl 
over a bilUon shares in less than 10 years. The sales from 1922 td 
1932 amounted to over $50,000,000,000. About $3,000,000,000 came 
from abroad for the purpose of buying stocks on the American sef 
curity exchanges. 

The total loans made to brokers on the New York Stock Exchange 
alone amounted to $8,600,000,000 by September 1929. The loan^ 
made in other security exchange markets amounted to about $3,000i 
000,000 more. \f. 

It had the effect on the New York Stock Exchange of raising th^ 
prices of common and preferred stock to a gross of $89,000,000,000, 
When the credit was withdrawn, a violent shrinkage in the value of 
these stocks took place. They were quoted for approximately $12,- 
000,000,000 in 1932, at the low. 

Check debits fell from $1,230,000,000,000 in 1929 to $430,000,000,- 
000 in 1933. The effect of this contraction reflected itself naturally 
in the increased purchasing power of the money in terms of stocks 
that remained, so that dollars bought about seven times as much stock 
at the low in 1932 as at the high m 1929. ! 

The effect on the price of commodities, however, was very much 
less because commodities comprise the actual necessities, comforts,, 
and conveniences of Ufe which the people employ day by day. There 
was no speculation in the commodity markets during this period* 
Therefore, the purchasing power of money in terms of commodities 
fell only to 60 at the low point from 95 in 1929. 

While tliis contraction in the money supply was taking place 
and the demand bank deposits and convertible time deposits feU 
from $34,000,000,000 in 1929 to $14,000,000,000 in 1932, the volume of 
commodities also fell, due to unemployment. This made commodities 
scarcer and, therefore, worth more in terms of money, and helped 
to prevent the money rising higher in its purchasing power of com- 
modities. 

Money, therefore, is affected in its purchasing power not only by 
the expansion and contraction of the volume of nioney but also by the 

general expansion and contraction of the volume of commodities 
ought and the volume of securities for sale. 

The price level, or all-commodity index, might be affected by a gen- 
eral drought that would make scarce all ^ricultural products and 
influence the products of animal industry. h\ r^uiating the value of 
money by r^ulatin^ the volume of money accoimt must be takect 
therefore, of any national drought or state of war that would interfere 
with the normal flow of commodities. 



NATIONAL BCONOMy AND THE BANKING SYdTBM 

Tliere m^ of ah individual 

jBoininpiiity. If this 8uj>pl^ olwheat is in great excess of what the 
Ametic^ people require mi wheat (or the substitutes available for 
wheat) then wheat will fall in price under the law of supply and 
id^&nd because of its superabundance. The same thing is true with 
cotton or potatoes^ regardless of the volume of money. But, if the 
Volume of money is expanded and the potato crop is only half the 
jiionnal supply, the pirice of potatoes would rise very much higher 
because of the two factors of scarcity of potatoes and unusual abun- 
dance of money. If, on the other hand, the money supply was 
greatly contracted and the potato crop was two or three times as much 
as normal, in many places the potatoes would remain in the ground, 
^o t worth digging up . 

V It is extremely difficult to forecast whether a potato crop will be 
superabundant or extraordinarily scarce, because it depends upon 
many factors, particulariy climatic conditions. 

, The United Staies Government, however, through the employment 
of its present faciUties and its present laws, can regulate the value of 
mone;jr in regard to commodities and all forms of property, leaving the 
individual commodity to be Controlled by other factors which may or 
may not be controUed by the Government. 

The following table shows the annual supply of check money and 
the rise and fall of the price level from the years 1929 to 1938. 

Rise and fall of checks cashed and the price level 





Checks ' 


Price 
level 


— 


Checks 1 


Price 
level 


1929 


1,230 
900 
660 
4fi0 
430 


96.2 
86.8 
72.1 
63.9 
65.0 


1934 


470 

sno 

6!1 
637 
530 


74.6 


1930 


1936 


79.8 


1931 


1936 


80 6 


1932. 


1937 


81.7 


1983 


December 1938 


77.0 









'Indicates billions and decimals thereof. 

Source: Board of Governors of the Federal Reserve System. 

Chapter IX 



tHE RELATIONSHIP OF THE PRICE LEVEL TO FACTORY EMPLOYMENT 

AND WAGES 

It is of importance to understand the relationship of the price level, 
or money supply, to fa_ctory employment and factory wages. 

Naturally, when the money supply is severely contracted, there 
will be a shortage of money with which to buy the products of labor. 
And, therefore, the products of labor must be diminished because the 
factories cannot afford to create products which cannot be sold. 
When there is a great scarcity of money, therefore, the result is a 
shortage of the means of paying wa^es, salaries, and carrying inven- 
tories, as well as the means with which to buy the products of labor. 
When consumption of the products of labor is cut down it results in 
cutting down the production, which means cutting down the number 
of tiiose employed in production. 

Necessarily, a shortage of money means a lesser consumption, 
lesser production, lesser emplo5anent. 



NATIONAL BOONOMY AND THB BASnSINa STSratf ^ 

This reasoning is borne out by the statistical evidence collooted ^jT 
the Department of Labor for a long peiiod of time. It is of impoiv 
tance to imderstan^^l this vital fact: That factory employment and 
factory wages fall when there is a contraction of the money supply, 
and rise when there is an expansion of the money supply. 

The following table graphically sets forth these comparisons for fh^ 
years 1920 through 1936. 



The effect of the rise and fall of phe prici 


' level on factory employmerU and loage* 


Prices 


Epyploy- 
ment 


Pay roll 


Prices 


Employ- 
ment 


Payroll 


1920: 

164.4 


114.9 
113.7 
116.0 
114.5 
112.0 
111.1 
108.6 
108.8 
107.6 
103.7 
97.4 
89.7 

81.0 
82.6 
83.2 
82.1 
81.9 
81.0 
79.8 
81.2 
83.4 
84.1 
84.2 
83.3 

82.5 
84.6 
85.9 
85.8 
87.9 
89.8 
88.2 
91,4 
94.5 
97.0 
99.0 
100.5 

100.7 
102.5 
104.6 
105.0 
105.3 
106.0 
104.9 
106.2 
105 7 
104.6 
103.2 
101 4 

100.2 
101.5 
101.7 
99.9 
96.8 
93.8 
91.0 
92.1 
94.4 
95.3 
94.8 
96.1 


117.2 
115.5 
123.7 
120.9 
122.4 
124.2 
119.3 
121.6 
llfl.8 
116.8 
107. 
98.0 

82.8 
81.3 
81.7 
79.0 
77.3 
76.4 
71.7 
73.9 
73.4 
72.6 
71.7 
73.3 

69.6 
72.4 
74.9 
73.8 
77.2 
80.6 
78.6 
83.0 
87.0 
89.6 
93.4 
95.7 

94.6 
97.9 
102.5 
103.8 
107.3 
107.6 
103.3 
103. 8 
104.3 
106.0 
104,6 
102.9 

98.8 

104.1 

104.1 

101.8 

97.6 

92.4 

85,7 

89.3 

92.6 

96.1 

93.7 

97.6 


1925: 

106.0 


96.3 
96.1 
98.8 
98.7 
98.1 
98.0 
97.8 
99.6 
101^5 
102.2 
101.8 
101.6 

100.6 
101.6 
102.1 
101.4 
100.4 
100.3 
99.4 
101.4 
103.4 
103.1 
101.4 
100.0 

98.2 
99.7 

100.2 
99.6 
99.1 
99.1 
98.1 
99.3 

100 6 
99.6 
97.4 
96.1 

96.0 
96.6 
97.6 
97.1 
97.0 
97.8 
97.7 
100.1 
102.2 
102,6 
101.7 
101.2 

100.8 
102.9 
104.1 
106.8 
105.3 
10S.0 
100.1 
107.0 
100.0 
107.7 
103.6 
90.8 


95.4 


153,9 


106.4 


100. S 


166.0 


106,6 


102.4 


161.9 


103.4 


100.0 


les.o 


102.6 


100,7 


160.7 


104.2 


98.7 


1,1)9.4 


106.3 


96.8 


153,9 . 


loo.ii....: 

106,8 


99.8 


IfO.O 


1)8.8 


140.0 


> 104.3 - 


104.6 


130.0 


I 104.4 


104.0 


118.7 


103.4 


10&.3 


1921: 

112 4 . . 


1926: 

103.2 


100. 


106 


102.5....: 


105.0 


102 9 


100.6 


100.6 


99.0 


100.0 


104,4 


96,3 .. 


100.6 


103. t 


93 S 


100.8 


103.8 


93.3 


99.7 .V. 


99.0 


93 8 


98.7 


103.4 


93.8 


99.6 

99.1 


104.4 


93.8 


107.6 


93.2 -- - 


98.0 ,. 


104.1 


92 6 


97.4 


108.5 


1922: 

91 6 - - 


1927: 

96.6 


9^4 


93.6 


95,9 r 


104.4 


95.5 


94.6 i 


106.7 


95.6 


93.7 


104.5 


98 8 


93.7 


lOiO 


990 . - . 


93.8.. 


102,4 


102.6 


94.1 


96.0 


102.6 


95.2 


101,9 


101 2 


96,5 


101.4 


102 .... 


97.0 


102 1 


103 


96.7 


96.0 


103 4 - - 


6fj,8 


90.5 


1923: 

103 1 


1928: 

96.3 


96.0 


103 8 


96.4 


101. 1 


105 - - 


96.0 


102.5 


lO'iO 


97.4 


100.5 


103 5 


98.6 


101. 3 


1017 


97.6 


101.7 


998 


98.3 


oe.t 


99 4 .... 


98.9 


103.8 


101 8 


100.1 


104.7 




97.8 


ioe.a 


100 7 


96.7.. 


105; 


100 


96,7 


105,6 


1924: 

1000 


1929: 

97.2 


10l9 


100 5 


96.7 


100. t 


99 3 


97.6 


Ul;« 


983 


96.8 


113; • 




95.8 


n%,9 


95 7 


96.4 


nhi 


97 3 


98.0 


107.9 


99 1 


97.7 


US.0 


98 5 


97.6 


tix» 


100 6 


96.3 


1114 


101 1 


94.4. 


104.1 


103.9 


94.2 


i9Q.r 



M 



liAi^iONAt BkJCM^oMt AM) ra^ BAifKma stsrsoi 



^iU^««iofiheriieandfdUof^^ IwelohfaHary employrMnt and w»ge9-^Con. 



. Prioii 


Employ- 
ment 


PsyroU 


Prleea 


Employ- 
ment 


Pftyroll 


1S30: 

t 93,5 


97.3 
97.3 
96.9 
96.8 
04.8 
92.9 
89,6 
88.8 
89,6 
87.7 
84.6 
82.3 

79.6 
80.3 
80.7 
80.7 
80.1 
78.4 
77.0 
77.1 
77.4 
74.4 
71.8 
71.0 

68.7 
69.fi 
68.4 
66,1 
63.4 
61,2 
68.9 
60.1 
63.3 
64.4 
63.4 
62.1 


95.9 
98.8 
98.8 
97.7 
96.4 
92.3 
84.3 
83.3 
84.1 
82.2 
76.8 
76.2 

70.0 
74.3 
76.6 
74.4 
73.4 
69.7 
66.2 
66.9 
63.4 
61.3 
68.1 
67.6 

63.6 
64.6 
63.1 
49.6 
46.8 
43.4 
39.8 
40.6 
42.9 
44.7 
42.9 
41.6 


1933: 

62.0 


6a2 
61.1 
68.8 
69.9 
62.6 
66.9 
71.6 
76.4 
80.0 
79.6 
76.2 
74.4 

73.3 
77.7 
80.8 
82.3 
82.4 
81.1 
78.6 
79.4 
76.8 
78.4 
76.8 
78.1 

78.6 
81.2 
82.4 
82.4 
81.1 
79.7 
79.6 


39.5 


©1.4 


69.8 


4a2 


903 


60.2 


37.1 


90.0 


60.4 


38.8 


88 8 


62.7 


42,7 


Mg 


66.0 


47.2 


. 84.4 


68.9 


60.8 


84,3 


69.6 


66.8 


84.4.. 


70.8 


60.1 


88,0 


71.2 


89.4 


91,8 


71.1 


65.6 


79,8 


70.8 


64,6 


mv. 

78.2 


1934: 

72.2 


54.0 


78,8 


73.6 


60.6 


780 » 


73.7 


64.8 


78.4 


73.3 -• 


67.3 


78,2 . i 


73,7 


67.1 


72.1.. 


74,6 


64.9 


72.0 - - ... 


74.8 


60.4 


73,1 


76.4 


6Z3 


71,2 


77.6 


59,1 


708 


76,5 


61.0 


70.3 


76.8 


69,6 


68,6 


76.9 


63,2 


19«3: 

67.8 


1936: 

78.8 


64,1 


88.8 


79,6 


69.1 


88.0, 


79.4 


70,8 


866 .. -. 


80.1 


70.7 


84.4 


80.2 


68.6 


83,9 


79.8 


06.6 


84.6 .. . 


79.4 


65.3 


86.3 


80.6 




86.3 


80.7 


83.6 
86.3 
84.8 
84.6 


72.1 


84.4 


80.8 


76.1 


83.9 


80,6 


74.6 


63.6 . - 


80.9 


72.2 









Bottroe: Hearings before the House Banking Committee on H. R. 7230, March 1938. 

It will be observed that as the price level, which represents the 
Tolume of money employed in buvmg all of 784 listed commodities 
in the wholesale markets, rises or falls, within from 30 to 60 days, as 
a rule, factory wages and factory employment rise and fall correspond- 

The following table gives the high and low points for the same period 
of time: 

Table showing index price level, factory employment, and factory wages 

(Al «mployment and wages have a short lag, the figures in italios below have their dates a month or two 

later] 



Commodity index 



7lllitl030 166.7 

jMUury 1933 down to - 91,6 

AprUltoupto 1060 

Jttil* 1W4 down to 96,7 

▲mast 1938 up to 106.5 

fiSlWdownto M.7 

««plfmb«rlO»apto 100.1 

OotoSw 1«3B 100. 1 

ftSruary 1988 down to g»g 

iiptombar lOBSup to 70.8 

ICM 1086 up to 70,6 



Factory 
employ- 
ment 


Factory 
wages 


111.1 


124.2 


82.6 


69,0 


106.0 


107.0 


91.0 


86,7 


lon.t 


10L9 
88.9 


98, t 


lot, 9 


108.9 


100.0 


113. 9 


S8.8 


S8.9 


8ao 


60,1 


84.2 


75.7 



Botmtt: IBMHnp b«for« ths Committee on Anioulture and Forestry, Unltsd Statss Senate, 7&th Cong., 
D firm oomnodity iwloss, Juna 7, 8, and 9, 1087. 



It is of importance to remember that for ^very man and Womiiii «ii|f 
ployed in the factories there IB a oonstajit ratio of about two and oni^ 
half persons employed in other lines of business. In order, therefore/ 
to restore factory employment and other lines of employment to a 
maximum, it is necessary to expand the money supply and to raise the 
price level to at least normal, until a sufilcient amount of money is 
supplied to pay annual living wages to all of those who iare able and 
wilhng to labor in the factory, the field, the mine, and in the services. 

THE PBICE LEVEL IN RELATION TO CAR LOAniNOS 

The price level, representing as it does the relative volume of money 
employed in the wholesale markets, should be compared also with the 
index of car loadings as further proof that changes in the money supply 
employed in the wholesale markets is accompanied by corresponding 
changes in the index of car loadings. 

The index of car loadings is based upon absolute knowledge of day 
to day figures and, therefore, is very dependable. 



The price 


level and freight car hadinns 






Year 


\ 

Price 

level 


Freight 
car load- 
ings i 


Year 


Price 
level 


Freight 

carload* 

ingfii 


1925 


103.0 
100.4 
94.1 
96.7 
95.2 
86.8 
72.1 


103 
107 
104 
104 
107 
92 
74 


1932 


63.9 
65.0 
74.6 
79.8 
80.6 
81,7 


&s 


1926 


1933 


68 


1927 


1934 


62 


1928 


193a . .. 


64 


1929 


1936 


76 


1930 


1937 


78 


1931 











• Average per working day. 

Source: Board of Qovernors o( the Federal Reserve System. 

These carloadings, it should be remembered, indicate the greatest 
factor in the revenues of railroads. Their falling off during these 
years plainly points out that the most important reason for the distress 
of the railroads is the contraction of the money supply in the wholesale 
markets. The money employed in the wholesale markets represents 
the diminished purchasing power of the consumers due to a contrac- 
tion of the money supply. 

THE EFFECT OP THE VOLUME OF MONEY ON THE VOLUME OF CON- 
STRUCTION CONTRACTS 

It will be noted that the index of construction contracts varied in 
the same manner, substantially^ as carloadings and industrial produc- 
tion. The index of construction contracts, as compared with the 



J4 NATIONAL BCONOMt AND THE BANKINO SYSTEM 

pi^« leyel^ or all-coi^ or volume 6f money employed in 

the wholesale markets, for the years 1926 to 1936, inchisive, follows: 

The price level and construdwn contract awarded (value) 



Year 


Price 
level 


Construc- 
tion con- 
tracts 
awarded 
(value) 


Year 


Price 
level 


Construc- 
tion con^ 

tracts 
awarded 

(value) 


19».l 


100.4 
94.1 
96.7 
95.2 
86.8 
72.1 


129 
129 
13fi 
117 
92 
«3 


1932 


63.9 
65.0 
74 6 
79. R 
80 6 


28 


1M7-.; 


1933-...""; 


25 


192H 


1934 


32 


»»:.. .;.......:. ..„.: 


1935 


37 


10m. 


1936... 


56 


1«81„, 











Source: Board of Governors of the Federal Reserve System't 

THE EFFECT ON EXPbRTS AND IMPORTS OF THE CONTRACTION OF CREDIT 

AND THE MONEY SUPPLY 

It seems desirable to call attention to the contemporaneous effect 
upon our imports and exports as compared with the volume of checks 
debited — money supply. 

The following table shows these relationsliips: 

Check money aiid exports and imports 
(In billions and decimals thereof] 



Year 


Check 
money 


Exports 


Imports 


1989 


1,230 
900 

oeo 

450 


6.2 
3.8 
2.4 
1.6 


4.4 
3.1 
2.1 
1.3 


1930 


1931 


1032,,., 





Year 



1933 
1934 
1936 



Check 
money 



430 
470 
530 



Exports 



1.7 
2. 1 
2.3 



Imports 



1.4 
1.7 
2.0 



Source: Board of Oovernora of the Federal Reserve Sy?tem. 



THE EFFECT ON OUR BUSINESS ENTERPRISES OF THE CONTRACTION OF 
CREDIT AND THE MONEY SUPPLY 

During the World War, when credit was greatly expanded, from 1914 
to 1920, the normal number of business failures which occur from the 
incapacity of individuals was diminished. When the contraction of 
credit and currency took place in 1921, in the summer of 1920 and 1921, 
these failures increased in number and in the amount of money involved. 

The effect of the depression of 1921 on the banks of the country was 
very serious, since it diminished the solvency of individual borrowers 
and the value of investments held by the banks. When the depression 
of 1929-32 came, these effects again reappeared increasing the number 
of failures and the amount involved. 

The effect which follows such a depression is not always immedi- 
ately felt by the business houses or by the banks because men do not 
fail until they are forced into failure. This takes a certain element of 
time. 

There is here inserted a table showing the munber of failures and 
the amounts involved in business houses with the decline in the number 
of banks in the United States from 1914 to 1935. 



NATIONAL BCONOMY AND THB BANItINO 8T^T9B| 

Dtdine in the number of hankt and commeretal failuret with amoufUt iwHtbkd 



Year 



1914 

1915 1 

1916 \ 

1917 

19J8 

19U9 

1920 

1921 

1922 

1923 

1924 

192« 

1926 

1927 

1928 

1929 

1930 

1931 

1932 

1933 

1934 

1936 



Number of 


Number of 


Total 




national 


State 


numb«rof 


Nujnberof 


banks 


banks 


h&ntn . 


oommw- 


(Juno 30 or 


(June 30 or 


(JUiie3M>t>r 


> eial 


nearest 


nearest 


ntsiswx 


fUltlM 


date) 


date) 


date) 




7,814 


18,760 


26,274 


18,280 


7.697 


19,008 


26,605 


22,1M 


7,671 


19,470 


27,041 


16.093 


7,599 


19,896 


27,496 


. 13,866 


7.699 


20,635 


28,334 


9,982 


7,779 


20,821 


28,600 


0,451 


8,024 


21,805 


29,829 


8,881 


8,160 


22,410 


30.560 


19,652 


8,244 


21,914 


30,158 


23,679 


8.236 


21, 597 


'.>9,833 


18, 718 


8,080 


20,916 


28 996 


20*616 


8,066 


20,413 


28.479 


21,214 


7,972 


19,882 


27,864 


21.778 


7,790 


18.976 


26,766 


23, 146 


7.685 


18,266 


25,941 


23,842 


7,630 


17,680 


25, UO 


22,909 


7.247 


16,606 


23,852 


26,366 


6,800 


16,103 


21,903 


28,385 


6,146 


12,901 


19.046 


31.822 


4.897 


9,622 


14, 619 


20,307 


5,417 


10,418 


15, 835 


12, 185 


6,425 


10,669 


15.994 


11,879 



AouNtntflf' 

(ltiinft> 
ttooa) 



8fl8.S 

196. S 
183.4 
163.0 
113,S 
396.1 
627.4 
«23.ft 
639.4 
543.3 
443.7 
400.3 
620. 1 
488.0 
483.3 
668.3 
736.8 
938.3 
602.8 
264.3 
330.1 



Source: Board of Governors of the Federal Reserve System. 



Students will recall where the contraction of money took place in 
1921 and in 1929-32 it was reflected in the items above set forth 
immediately. i^ 

Chapter X 



thp: index op industrial production 

The index of industrial production is based upon the volume of a 
number of industries, under some 60 classifications, representing about 
80 percent of the total of the national industrial production. 

This index was based upon the years 1923-25 in order to give a 
more stable basis of comparative calculation in succeeding years. 
These calculations are made from a vast amount, of data and are 
worked out by mathematical and economic calculations. A full 
explanation of these calculations and the methods by which they are 
made will be found in the Federal Reserve Bulletin of February and 
March 1927, and reprinted in a pamphlet in November 1937. 

The index of industrial production represents the percentage of the 
volume of industrial production of 1 year as compared to the basic 
average of 1923-25, which was put at the arbitrary figure of 100 for 
purposes of comparison. 

The kinds of industries used as a basis and their relative importance 
are as follows: 

RtmH 
Data used in index of industrial production *^S?f* 

Manufactures 86. 71 

Iron and steel and their products ^._ __ 19. 77 

Textiles and their products _ 17. 74 

Food products _ ^ _ 9, 10 

Paper and printing 10. 7j5 

* Computed from average annual data for the S-base period fears, 1923-S5, with revisioni to 1937. 



m 



vkTionjjjmm^tmi kiiny^^^ 



p€Ua u§ed in ind^ <^ iiuii^ridl produeHcmr^pniinu^d *^f 

sr »ik1 allied products _ ._, & 27 

Tri|ipuq>orti|iion <^^ ..:-»-- _., 6. 36 

)UMiil)ieGr iuid i^nUnufaHum - _ 3. 37 

StoiML day, and glaaa products _ 2. 66 

Metals and metal products, other than iron and steel 1. 76 

Chemicals and allied products 1. 96 

Rubber products _ _ 1. 87 

Tobacco manufactures 1. 08 



Minerals _ 14. 29 



Industrial production 100. 00 

8<mroe: Board of Qovemo j fA the Federal Reserve System. 

The index of industrial production should normally expand at the 
rate of 4 percent annually because of the increase of population, of 
horsepower, and of Islectnc energy used for light, heat, and power. 

As an example, power-producmg machinery in the United States 
has mcreased from 704,266,000 horsepower in 1924 to 1,198,000,000 
in 1^36. The increase of electric energy has been much greater than 
4 percent per annum and the expansion of this power in process of 
production may be expected to continue this increase for years to come. 

In the Federal Power Commission's pamphlet "Electric Power Sta- 
tistics" the following table appears, giving the expansion of kilowatt- 
hours since 1920 through 1937: 



Production of electric energy in the United States 



Total i 



1929 _ 95, 166, 46JJ 

1930, 93, 866, 381 

1931 90,089,862 

1932 81, 827, 806 

1933 _ 84, 176, 704 

1934_-_ 90, 219, 967 

1936 - 97, 811, 306 

1936 111,431,367 

1937-- 121, 049, 630 



1920 42,664,014 

1921 40,584,040 

1922 47, 071, 804 

1923. _ 64, 857, 797 

1924... 68,137,300 

1926 66,011,833 

1926 73, 066, 002 

1927- 78,579,669 

1928 - 86,769,014 

> TbouBande of kUowatt^bourv. 

It will be observed that the total of kilowatt-hours has increased 
from 42.6 biUions in 1920 to 121 biUions in 1937, nearly 200 percent 
in 18 years or over 10 percent per annum; whereas our money supply 
since 1926 has decreased at least 23 percent, as shown by the volume 
of monej employed in the wholesale primary markets, the all-com- 
modity mdex having gone from 100 down to 77. And our total check 
money having gone from $845,000,000,000 in 1926 to an estimate for 
the year 1938 of approximately $530,000,000,000, a contraction of 
$300,000,000,000 m 12 years, or about 36 percent. 

THB BELATIONBHIP OF THE INDEX OF INDUSTRIAL PRODUCTION TO THE 

PRICE LEVEL 

The price level, or the volume of money employed in the purchase 
^f the 784 commodities in the wholesale markets, has a very important 
relationship to the index of industrial production, as well as to factory 
employment. 

When the price level, or volume of money, rises in the wholesale 
markets, the mdex of industrial production rises. When the volume 



id money &ixkfAojfid m tb« wholaedle maiiEete ttXkf iht initetf Jeb 
dudtrial produoiioii fallft^ , » 

; For example: In 1929 the price level wm 96, and the iigbdear ^ 
industrial production waa 119, lor the average oi 1929. Ill JBtebfuarf 
193S the index of the voliune of ttumev eni^loTed in the wholeaafo 
marketB, or the price level, waa 60 ana tl^e index of industrial mH 
duction had fallen from U^ to 64» In July 1938 the index of induamal 
production Waa 81 while the price level was 78.8. i 

It thus appears clearly that the volume of money employed in tlia' 
wholesale markets not only indicates the purchasing power of monejr^ 
but it demonstrates that with the fall of the volume of money in tfo 
wholesale markets, industrial production falls in correepondmg degreitf^ 

We have elsewhere showii that the price level, or volume of money 
empl(»red in the wholesale markets, mdicates factoir emplo^finent)' 
and' that factory employment rises as the volume of money in thar 
wholesale markets rises. Of course as factory emplovment riaea 
industrial production would necessarily rise* So that both the rea8C»i> 
and the statistical fact should be penectly clear that the volume of 
money employed in the wholesale markets indicates f actoiy employ-*^ 
ment and industrial production. 

In dealing with factory employment and industrial production.v 
the money employed in the wnolesale markets is therefore a vital 
determining influence. 

Since the rise and fall of the price level, or the money suppl:^,' 
indicates the rise and fall of employment and factory production, it 
is of importance to note the relationship between the price level and 
the index of industrial production. Tne following table shows this 
relationship: 



Th€ price levd and ihe index of industrial production 




Year 


Price 
level 


Indexed 

industrial 

production > 


■i Yaur 


Price 
teTel 


Index €f . 
Indmtriiil 
prodoetkn% 


W26 


100.4 
94.1 
9C.7 
96.2 
88. 8 
72.1 


106 
106 
111 
119 
96 
81 


1933 


68.0 
66.0 
74.6 
79.6 
80.6 
81,7 


M 


1927 


193S 


Tl 


1928 


1934 


911 


1929 


1936 


1990 


1030 


106 


1931 


1937 


lid 









I Average per working day. 

Source: Board of Qovemort of the Federal Reserve System. 

Chapter XI 

- .) 

THE INADEQUACY OF THE PRESENT TERMS "THE PRICE LEVEL*' ANIk 
"THE PURCHASING POWER OF MONEY*' 

The present term, "the price level,'* based on the volume of mone^^j 
employed in 1926, does not take into account any change in th#* 
volume of commodities on which the price level is based. And, of 
course, the term "the index of the purchasing power of money** also 
ignores the change in the volume of the designated commoditaes. 

It should be obvious that if for any reason the volume of such com* 
modities should increase 4 percent per annum, the volume of money 
employed should rise 4 percent, otherwise the money employ^ wciula^ 
buy 4 percent more of tne commoditieB and products of labor, wh^«a|i. 



2g Mfumkii moo^om^^^ 

ft iddh^ cif imif oim i^^ the BAme volume of 

ooiABQioditieB from one y^ar to luipil^ if labor is to receive a fair 
rcfwiffd.iii dollan f orwhat it creates/and if the debtor is to be allowed 
t0 jjftjr t^ creditor in^ dollars of the same purchasing power. 

To ixicreaie industoial production requires an increase in the money 
•up^ly up to the point that maximum employment of men and machin- 
^ is achieved. Beyond this point no expansion of money seems to 
be desirable^ and any serious expansion beyond this point might be 
lyii^y disadvantageous as it would have the effect of unduly increasing 
^ value of property and decreasing the purchasing power of money 
in those fonns of property in which money is invested, such as stocks, 
bonds, real estate, etc. 

Many people have objected to any rise in the all-commodity index 
b^ause it has been desienated loosely as ^'the price level." Many 
people think, therefore, that raising the price level means only raising 
the price of individual commodities which they wish to buy, for- 
getting that increasing the money supply would end imemployment, 
would create a rising individual income, individual wages, and in- 
ereaae the market pnce of the products of labor. This is not true. 
if the money supply were to rise 50 percent while the volume of 
oomnKMiities rose 50 percent, the market price of the individual com- 
modities on the average would not be changed, since the 50 percent 
increase of such commodities would diminish the market price of indi- 
vidual commodities in proportion, and the increase of the money sup- 
ply would merely offset what otherwise would be a contraction m 
the selling price of what, the people produce. Giving them a fair 
price for what they produce, enables them to have the consuming 
power with which to buy what they produce. 

At last, the producers of the United States and the consumers of 
the United States represent all of the people. 

Individual commodity prices majr be raised by the scarcity of 
individual commodities or may be raised by artificial means through 
monopolies fixing the price of their products, such as copper, leadj or 
apedal products. The question of artificially raising pnces unfairly 
mroueh monopoly lies outside of the field of monetary science, except 
to call attention to it as a factor of prices. 

It has been complained that prices are artificially raised in construc- 
tion by bricklayers, plumbers, and carpenters through labor unions 
charging an. excessive price for their labor, as compared to the labor 
of other people engaged in services to each other. This may be true, 
but that question is a question which is no part of monetary science, 
beyond pointing out the fact that stability in our industrial life, when 
established through public monetary control, will enable the Govern- 
ment to better control monopoly; and will enable labor, by virtue of 
stability in continuous employment, to make contracts involving an 
annual living wage, rather than the present precarious employment 
of bricklayers, plumbers, carpenters, etc. 

Chapter XII 

THE MBTHODB BT WHICH MONEY IB EXPANDED AND CONTBACTED 

The money of the country, consisting of currency and demand back 
deposits, is expanded as follows: 

The currency of the United States, which is required for pocket 
money aiid to p&y for the purchases daily of products and services, 



!• iiiint«4 and i»inted ^^b^ ttie Gbv«niiiieiit and dkinbutoA 14 
baaka of tlie einiiitiy througii th« Fod«rid Reaenre banka, Ilia m 
caU for the cumn^ to tha extent that they need it for tlia ptmilt^ 
and inunediate oaahing of ohedka by depoditoni. The ptofA^* mn^ 
fore,,q>btain^^thia^i^^ Irbm ti^ Op Wiiinaiit. Tlw Q<»mQ»aitl 
ereatea aU of this money. The Statea are fbrlnddek to iaumximiiImB 
it, and it i« a crime to oounterfnt it. Thia cumnqy ia uaad ia • 
medium of exchange. When a merchant reodyea from hb mailOBiaii 
more currency than he needs in his till, he deposits it with the baalou 

When the banks receive more currency than they require, ikf9^ 
aend it back to the Federal Reserve bank of their district BXkd recMTa 
credit for it. The currency may be returned to the Federal Reaerva 
agent by the Federal Reserve bank if it has an excess. It not only 
is employed as a medium of exchange hj the people, but~amn^ people 
who have no bank account keep their utile supply of money in aoma 
safe place as a hoard from which they ci^n obtain money for an|^ 
unusual demand, such as sickness, a birth or a death, or a marriaga 
in the family. Sometimes this hoarding becomes excessive atut 
ctii^es a dearth of the currency supply. So that this currency mi^f 
be contracted bv the citizens who have it as pocket money. Tlua 
occurs during a depression when money becomes scarce. 

Demand bank deposits, upon which check money is drawn, are 
created by loans and investments as described in a previous chapter; 

It is of special importance that students should observe the mannety 
in which the reservoir of demand bank deposits can be contracted 
as a medium of exchange. 

If the loan of a businessman is paid upon the demand of the bank^ 
or becailse the businessman wishes to pay it, it is paid with a chedi 
on a demand deposit, and the demand deposit ceases to exist to 
the extent of the amount of the check. From 1929 to 1933 such 
business loans were contracted from 41.6 billion to about 21,2 billion 
dollars, thereby contracting the volume of demand deposits and 
of time deposits (which had been exchanged previously for demand 
bank deposits), leaving the deposits of the banks 20 billion dollars 
less than thejr had been in 1929. This was a contraction of the 
demand deposits by the contraction of loans. The amount in which 
demand deposits were contracted from 1929 to 1938 is shown by the 
following table: 

Contraction of demand depoaits and decline of bank loane 



1929 
1930 
1931 
1932 
1933 



Total loans, 
all banks i 



41.fi 
40.6 
35.4 
27.8 
22.2 



Estimated 
debits to 
individual 
aeoountcfor 
all oommer* 
cial banks* 



1,230 
900 
«0 
4S0 
430 



1934 
1886 
1986 
1«37 

ion 



Total kNuii, 
aUbuilttt 



31.8 

mi 
sai 

22.8 

3L1 



■eeoaplilBf 
•Qooonlti** 



S 



> Id billions of dollars; June SO or nearest date. 
* In bllliona of dollars; annual flfuies. 

Source: Board of Oownon of the Federal BeairTe Syatam. 



f0 xA^noMiO' wxm 

u iliilffllbtiwi by t^ th^ United SUtee began in 

ttiMK io mcreeee tlie nooni^ eiipiily 1^ the sale of b<Huii, the deposite 
bem to liee again. 

r It is ol die greatest impprtanee that etudente sbotjld tindentand 
Ibat a deinand depQ«ii| which is hoarded by Uie depositor and kept 
WMknployed awaiting future use or inveetxnent, does not function as a 
aii^i^!™ of excham;e. A hoarded deposit is not used for the employ* 
ttmit of human labor, for tibe payment of wages and salaries, or for 
eairying invmtories of the products of labor. A hoarded demand 
di|>OBit IS temporarily as useless in the national economy ofproduction 
at if it did not exist. The Federal Deposit Insurance Con>oration 
in October 1934 located many billions of demand deposits that were 
hid as reserves. They were called dormant accounts. 

8udi iiiactiye, unemployed demuand deposits contract the volume 
el the medium of excnange existing in the form of demand bank 

^T^lbiim the Treasury sells baby bonds to smaU demand bank deposi- 
Im. it withdraws such demand deposits. The proceeds of the sale 
of the baby bonds become dormant accounts until expended by the 
dovemment. When the Government sells its bonds through the 
banks to the citizens, it has the same effect of temporary contraction. 

When it sells its bonds to the banks and the ba.nks retain the bonds, 
the volume of demand deposits is increased until the bonds are paid 
1^. When the bonds are paid off they are paid off through taxes 
eoUected by the Government from demand deposits. And, therefore, 
the payment of the national debt by taxation, without any further 
eixpansion of the demand bank deposits, would reduce demand bank 
deposits to zero and cause universal bankruptcy. 

Whenever the Government collects money by taxes it contracts 
temporarily the demand deposits, or the money supply. About 
$4,000,000,000 of tlie present demand deposits are held by the Gov- 
ernment, the States, and their subdivisions, as heretofore pointed out. 

Wh«i corporations, States, cities, or counties sell their bonds to 
the banks they create new money because the banks create and give 
them demand deposits in exchange for their bonds. The banks 
therefore create money by their investment in these bonds. When 
the bank takes the bonds, it, in effect, makes a loan to the State, 
city, coimty, or corporation. When such bonds are paid off, they are 
paid off with demand deposits as to the proceeds of taxes, or as divi- 
dends arising from profits to the corporations. 

When a corporation sells its goods to the public and receives there- 
for a net pront, it withdraws the net profit in the form of demand 
deposits. 

When an insurance corporation receives its preimums and makes a 
iwt profit, it does "So by withdrawing from the country demand 
depOMts. This is a contraction of credit process. When these 
moneys are paid out in dividends they are paid out in demand deposits 
•lid expand demand deposits again, as a cu»culating medium. 

When any creditor receives mterest on bonds or on loans or debts. 
be ift^paid ill dema»d deposits. .The demand deposits may then and 
there be withdrawn from circulation as a reserve for future investment. 

During the last few years $6,000,000,000 or $6,000,000^000 of gold 
kts come into the United States for the purchase of American dollars. 




Thk gold hftf b««Ki bouf^l by lh« Umled SMai tlnough ih^ 
of bonds and ooiivertod mto gpld certificates w hicah hayc De«;t d 
or pledged, to the Federal Reiervi» banks, Wbeii the Qot 

bought this goM thfhr contracted the money sii|m|y/t6 tlie 

represented by the gold, and When they iiiUea their oondi hi ]>i^^ 
they expanded the money supply ihroU|^ demand depoeila. The neH 
result of these transactions was to prey^t a&y emiaaion of monetaiy 
credit by the flow to the United States of thft gold. 

It was a contraction process when the $2,000,000,000 8tabiliaati0h 
fund was established, as it withdrew from circulation that amount of 

fold or its monetary ecjuiyalent. When the Qoyemm^t sterOiUd 
1,500,000,000 of gold, it was a credit contraction process. 

A member bank may contract demand deposits by seliing its bqbdi 
to the demand bank depositor, or by selling the depositor time depotilli 
in exchange for, his demand deposit, or a savings account in excnange 
for his demand deposit. A member bank, when it collects intereai 
on its loans and passes such interest to the account of undivMed 
profits, contracts demand deposits to that extent because the baiik 
18 pdd out of demand deposits by the borrower who owes the int^tiit. 

When the Federal Reserve banks buy the bonds of the Umtsd 
States, it will be an expansion of the mone^r supply. If bought frdu 
the citizen who holds such bond, the citizen would sell ms bottd 
through his local bank, receiving demand deposits for the b<md ahd 
the bank would transmit the bond to the Reserve bank as an addi- 
tion to the bank's reserves. Such a transaction would increase dm 
reserves of the member banks and increase the volume of demand 
bank deposits in the bank through which the sale was made^ 

If the Reserve bank were to buy a million dollars of bonds from a 
member bank, it would increase the reserves of such member bank 
by $1^000,000 in the Reserve bank but would not add to the demahd 
deposits of citizens engaged in industry. It would, however, facilitate 
the opportunity of the bank to lend such money to the citizen. 

If the Reserve banks were to buy from citizens on the open markejt 
State bonds, county bonds, city bonds, or corporation bonds, it 
would have the effUK^t of increasing the reserves of the banks whi^ 
sold them to the Reserve bank. If they were bought from atizeili 
it would increase the demand deposits of the citizens and also increase 
the reserves of the member bank through which the transaction waa 
made. 

The Federal Reserve banks^ therefore, have the power to expand 
the money supply to whatever extent is necessary to achieve maxi* 
mum employment, maximum production, maximum consun^ptibil^ 
and to restore the dollar index to the predepression normal oi IQO. 
They have the power to contract the money supply by selling the same 
secutities back to the citizens who have demand deposits. 

The Government, therefore, has the power, thmugh the Federal 
Reserve System, of expanding and contracting the money supply to 
whatever extent the public good requires. They can correct' ttia 
present scarcity of money and they can end the indefensible Ccoi- 
traction of the money supply which has taken place since 1929. 
They can prevent any indefensible expansion of the money supply 
(demand deposits or bank credit) by selling the bonds and so^wl 
bankable assets previously bought. 



1^ iliks )>^ «k ha^t of^ ihoie dkc^^ the tum-oVer of demand 
JMUaJi deposits by checi^ to speak of this turn-over as ihe velocity of 
nooikey. They deiennine Uie velocity by the nun^ber of times the 
|i(»tai of demiftnd bank deposits is contained in dii ^voku^e of checks 
dM^ted on U^e books of aD the banks. 

1^ conception ignores the fact that the total volume of demand 
b*iik deposit represents the holdings of millions of depositors, 
represents deposits which turn over 1(>0 times per annum, and other 
deposits that turn over once or twice, or perhaps not at all during a 
given year. 

Jn recent years it has been learned that in periods of active business 
Und f ull confidence, a very large part of those deposits turn over at 
Ihe high speed, and a comparatively small percentage are inactive 
iwad dormant. 

In times of depression, it has been found that inactive and dormant 
ACCOimts comprise a very substantial portion of the demand bank 
deposits. Therefore, it has become necessary to clearlj^ appreciate 
and to ascertain by a proper inquiry the extent to which demand 
deposits are dormant, inactive, and not vigorously functioning as a 
medium of exchange, economically employed in the rapid transaction 
of daily business. 

The Federal Deposit Insurance Corporation, in 1934, found that 
$0,000,000,000 of demand deposits were held as reserves by corpora- 
tions and individuals for future investment. 

In 1929 the total turn-over of demand deposits reached approxi- 
mately 60 times the volume of demand deposits. The demand 
deposits were $24,000,000,000 and the volume of checks debited was 
$1 ,230,000,000,000. But there were $10,000,000,000 of time deposits, 
quickly convertible into demand deposits, in that year. A sub- 
stantial part of these time deposits were functioning as demand 
deposits for the reason that the reserves required by law to be held 
by the banks against time deposits were small and the amount required 
to be held against demand deposits was large. In 1938, after the 
panic of 1937, about $4,000,000,000 of $26,000,000,000 was held by 
the Federal Government, State governments, and their subdivisions, 
received from taxes and in process of expenditure, and that the 
expenditures were being constantly replaced by taxes collected from 
demand deposits of those who pay taxes. 

The estimate made by the Government that the average turn-over 
for 1938 would be $530,000,000,000, would indicate ..that only 
$11,000,000,000 of demand deposits were turning over at a pre- 
depression normal of 50 times per alnnum. 

Thoughtful students will therefore beware of treating all demand 
deposits as moving with the same velocity, for this is by no means 
true. 

HOW DEMAND BANK DEPOSITS CREATED BY THE GOVERNMENT FLOW 

INTO USE 

The question has been raised that perhaps new demand bank 
deposits, created bv the purchase of Government bonds by the 
Beserve banks, would remain unemployed and idle. 

Those who sell interest-bearing securities for the purpose of obtaining 
liquid money do so because they wish to invest such money more 



ptofitikbly. Som» of tlieoi m%i^l ]^^ dotniuiti imtic^iAlisif tti^^ 
favoraUf opportimkf for mTw^n^ iroiild Im» «iil^^ 

immaterial p^use there ie no limit to whid^ Uieee d^>06lt« ooiit^ W 
inoreaaed^ if nebeaeaiy^ to cause an additio&al iioedliim «^ i^^ 
f miction, It aliollld be obvioua, ihff^^^&t, j^i Wbetl tt i^c^^uili^ m, 
famishing for ready money, the deixiimd for it will esuse tiie mm 
liquid money to ftow into commerce, induatry^ aiid invealiii^t, 

What is of the greatest importan(3e to obftMre is that the preset 
money, in the i<>rm of demand deposits held by those WJM) merchandise 
in money and stocks, will cease to be dormant whenever the Governr 
ment declares its purpose to ex{>and the money supply with a view 
to expanding employment. This is exactly what the dormant ac- 
counts are waiting for. They are waiting for evidence of a dependable 
rising market. 

Wiien, therefore, the Congress declares a national monetary policy 
and instructs the Board of Governors of the Federal Reserve System, 
the Treasury Department, and the Reserve banks to make effective 
such a national monetary policy, those who have been speculating in 
money, those who have been hoarding money, those who have been 
holding monev as reserve, and those who have thus contributed to a 
cornering of the money supply, will make haste, because of the profit 
motive, to invest money, which threatens to fall in exchange value, for 
property, which promises to rise in market price. 

Those who are merchandising in money with a view to speculative 
profits are well advised by tramed monetary experts, who tell them 
when it is desirable to accumulate money, and when it is desirable 
to invest money in stocks and other forms of property. There need 
be no fear that those who merchandise in money will fail to act with 
intelligent self-interest in search of profit. 

Thoughtful students will perceive the great importance of this 
suggestion. 

THE MONEY CREATED BY THE PEOPLE 

It has been pointed out that the failure of the Government to furnish 
the growing nation with a sufficient amount of money to transact a 
vast expansion of commercial business resulted in the people creating 
money tor tliemselves through National banks and State banks. How 
this was done, through private and public loans, has been described. ; 

But it is of importance to understand the volume which the people 
have thus created for their own convenience. 

Taking the figures of 1929, before the panic, the people had created 
$55,000,000,000 of deposits in the banks. These deposits con8iste4 
of savings accounts, tune deposits, and demand bank deposits^ The 
savings accounts and the time deposits had been obtained from demand 
bank deposits previously existing which were sold or transferred to 
the banks in exchange for time deposits and savings accounts. These 
savings accounte and time de^sits of course could be converted into 
demand deposits by the depositors, at their will, after an agreed uum* 
her of days' notice. 

The savings accounts had great stability because they represented 
money which prudent people kept in reserve for use in case of some 
unexpected exigency. The demand deposits were about $24,0()0,- 
000,000; the time deposits, about $10,000,000,000; and the savings 



M^^ Tfals did not hiclude the postal 

lliti^, nor Uie i otiif W n^ 

^;^S6i it mf^ be roucthl^ said^ thiat iJie people of the United States 
li^inanufactiii^ weir own money^ boldmg at that time about 
$24,000,000,000 of demand dejposits as an available medimn of ex- 
flange and $31,000,000,000 oi time and savines deposits, while the 
banks had an additional $5,000,000,000 of interbank deposits created 
by loans to, or deposits with, each other. In addition to this money, 
there Was about $7,000,000,000 of bank capital, including their surplus 
and undivided pronts. 

The savings accounts and the time deposits were, as heretofore 
stated, money in storage and not employed as a medium of exchange 
in the transaction of monetary business. The people of the United 
States, through the svstem of corporations and the security exchanges, 
where the stocks and bonds of such corpoiations and of governments 
are traded in, ^ad set up a vast machinery by which over 
$100,000,000,000 of such securities could be converted immediately 
into liquid naoney. These stocks and bonds, going into colossal 
figures, were investments of the American people, out of which they 
not only received dividends, but upon which they could rely in case 
of need to obtain liquid money by immediate sale in the security 
markets. On the New York Stock Exchange alone at present are 
1,400,000,000 shares of common and preferred stock. 

There are many other exchanges and there are over 300,000 corpora- 
tions whose stocks and bonds are not listed, but whose book values, as 
shown by the records of the Collector of Internal Revenue, exceed 
$155;000,000j000 as of December 31, 1929. 

Reference is made to these organizations and to the national wealth 
to show that the volume of money created by the people for their 
own use has been greatly in excess of what they recjuire iri the form 
of liquid money, or demand bank deposits circulating as a medium 
of exchange, tt is because of these great values and investments of 
the people that they have required so large an amount of money as a 
medium of exchange and as a storage of value. 

Students will thus realize that the volume of checks debited on the 
-books of the banks in 1926 ($846,000,000,000) is not surprising in 
view of the active dealings of the people with each other in the prop- 
erties involved. 

But since money is not only a medium of exchange but is a measure 
of value, it becomes of supreme importance that the Government 
should control and manage the volume of money required as a medium 
of exchange and measure of value. If the medium of exchange were 
expanded beyond the actual needs of the people for exchanging 
their products and services, it would result in inflation without 
^ding anything to the convenience and necessity of the people for an 
adequate medium of exchange. 

For this reason it becbmes vitally important that the Government 
should not only regulate the volxime of money in order to regulate 
the value of money, but should accomplish this through a statute 
setting up a sound national monetary policy that would always 
furnish the people with an adequate supply of money without 



inflationi wMch Woidd u^dul^ expajld t^^ of prbperfyJ 

Such a ^Tstem would be fortiQed equaHy against any inflatiDn and 
any indefenBible <M>ntraction of the money supply It should be 
implmented through competent executai^^ by law 

to cany out the national monetaiy |K>hcy dMared by Oongt«8B; 
(The . quantity of money currently required has been heretofon^ 
explained.) 

CREDIT EXPANSION THROtJGH THE SALE OF STOCKS 

. In 1900 the stock certificates on the New York Stock Exchange 
amounted to 66,090,180. These certificates increased by less than 
1,000,000 shares per annum until 1920, when they amounted to 
220,763,423. But by the end of 1931 they had increased to 1,296,- 



MUlloM 
of tharet 
1400 



1300 



(80IIH XX SBABIS U8fBD, 1900-19S1 



1000 
8X 
600 
400 
200 





99* of 

XtfMS 

1400 



1900 

1000 

000 

600 

400 

aoo 





Ok o* <n Qt at ot a* o> o» cn <n ot at o»oiotcnO)0'Ok(A(A(noioioioi<A<no>o» o* 
Source: New York Stock Ezobangd Bulletin 

794,480 (these figures are for January of each year, common aiid 
preferred stocks combined). A chart, taken from the New York 
Stock Exchange Bulletin for August 1931, showing this trend, follows; 

The number of issues increased from 377 in 1900 to 691 in 1920 
and then to 1,308 in 1931. 

Students will observe that beginning with 1921, the number of 
shares increased over 1,000,000,000 by 1931 which were sold to the 
general public and paid for by checks iawn on demand bank deposit^. 

During the 10 years from 1921 to 1930, inclusive, these stocks sola 
for $50,000,000,000 to the public and were paid for through the use of 
demand bank deposits. There was thus an expansion of ci^edit ija 
the form of salable stock certificates of about $60,000,000,000. 

In addition there was a sale of corporation bonds to the public* 
The New York Stock Exchange gives these figures frbm 1926 t(> 
August 1931, in the following table: 



DotaonaUUtUd b<m4t 



JHU 



Number 
of Is- 
men 



Nttitib«r 

OfiSSOM 



ATuras* 
prio* 



Parvaliwot 
listed bonds 



Tot«] market 
value 



S$h. 1/1920.. 
Jml 1,1927. . 
Im, 1.1038.. 
Jth. 1, 1920.. 
Jim. 1. 1930.. 
Atig. 1, 1930. 
8«ptM,1030. 
Oot. 1.1030.. 
Nov. 1, 1930. 
Dec. 1» 1930.. 
Jan. 1, 1031.. 
Feb. 1. 1931.. 
Mar. 1, 1031. 
Apr. 1,1931 - 
May 1^1931. 
Jdne 1,1931. 
July 1,1031.. 
Aug. 1,1031. 



824 
824 

840 
842 
840 
840 
»37 
838 
a36 
837 
836 
836 
836 
830 
842 



1,332 

1,367 

1,420 

1,491 

1,634 

1,543 

1,573 

1.578 

1,607 

1,616. 

1,600 

1,607 

1,602 

1,605 

1,610 

1.605 

1,608 

1,608 

1,608 



194.79 
95.98 
98.06 
99.98 
97.51 
95.59 
97.47 
97.69 
97.38 
96.47 
96.74 
94.63 

. 96. S2 
95,53 
95.42 
94.84 
93.67 
94.77 
93.14 



$36,457, 
36,996, 
37,900, 
36,881, 
48,588, 
49.058, 
60, 375, 
60, 467, 
50,027, 
60, 191, 
60,094, 
50,072, 
49,881, 
60,108. 
60, 788, 
50,911, 
50, MS, 
51,846, 
51,938, 



811,874 
089,633 
053.660 
320,122 
549.854 
099.434 
127, 717 
382,317 
129,663 
572,803 
547, 694 
879,897 
922,059 
076,488 
606,210 
76S, 944 
675,244 
247. 978 
698, 878 



$33,611, 
35,609, 
37.167, 
36,874. 
47,379, 
46,892, 
49, 101, 
49,293, 
48,715, 
48,417, 
47,959, 
47,384, 
47,546. 
47,869, 
48,463, 
48,282, 
47, 629, 
49, 132, 
48, 375, 



817,346: 
211,458 
607,468 
717,458 
028,602- 
458. 780 
898,301 
768,598 
222.900 
892, 161 
730,628 
805,889 
190,092 
817,156 
021, 490 
336,086 
698,234 
895, 763 
746,828 



Source: New York Stock Exchange Mulletlns. 

The sale of these securities was affected by discreet advertising 
campaigns and by bodies of salesmen trained to dispose of such 
eecuritifes to individuals. 

It resulted in a bull market which began to recede in 1929, when 
the loans of the banks contracted from $41,600,000,000 by $20,000,- 
000,000 at the end of 1932. 

The effect of this expansion of credit and contraction of credit in 
the value of the securities sold will be seen from the following table: 

Expansi on and contraction of the average market price of securities 



Date 


Number 
of Issues 


Number of 
shares 


Average 

market 

price 


Date 


Number 
of Issues 


Number of 
shares 


Average 

market 

price 


July 1,1925..... 

July 1,1926 

July 1,1927 

July 1,1928 

July 1,1929 

July 1.1930 

July 1,1031 


968 
1,066 
1,076 
1,118 
1,238 
1,319 
1,296 


462,696,000 
642,866,000 
623,764,000 
688,360,000 
945,341,000 
1, 231, 273, 000 
1,303,489,000 


$64.19 
65.59 
67.27 
76.89 
81.73 
51,89 
36.38 


July 1,1932 

July 1, 1933 

July 1,1934..... 

Julyl, 1935 

Jiily 1. 1936 

July 1, 1937 

July 1,1938 


1,263 
1,207 
1,203 
1,184 
1,194 
1.236 
1,256 


1,316,172,000 
1,286,081,000 
1, 294, 762, 000 
1,304,146.000 
1,339,680.000 
1, 3fi9, 6,50, 000 
1, 426, 893. 000 


$11.89 
28.29 
26.20 
27. 78 
38.00 
39.21 
29.41 



Source: New York Stock Exchange Yearbook and monthly bulletins. 

Students will observe that the average market price per share for 
1929 was $81.73, and was only $11.89 in 1932, showing an increase in 
the average purchasing power of the dollar of over 600 percent in 3 
years. 

The expansions of credit through these processes were man made, 
were uncontrolled by the Federal Government, and were incai)able of 
control by individual bankers, who were, nevertheless, exercising the 
legal right to manufacture money in the f^rm of demand bank de- 
posits, and contracting money so made through the simple process of 
r69uiring the loans they had made to be paid off. The legal right of 
privately owned banks, State and national corporations to expand and 
contract the money supply of the country without pvernmental reg- 
ulation, fully explains the financial and commercial disaster which 
began in 1929 and has not yet ceased (December 1938). 



^ Ghapteb XIII 



MONEY W CIRCULATION AS AN INDEX OF NATIONAL INCOIIB 

The National Bureau of Economic Research, in New York, toti* 
mated the income of the people of the United States f or the vears 
1919 to 1933 in terms of the current purchasing power of the dollar 
for each year and also in terms of the purchasing power of the dollar 
for 1929. A table comparing these figures with the price level, or the 
volmne of money employed in buying 784 commodities in Uie whole* 
sale markets follows: 

The price level and the value and volume of national production * 





Price 
level 


National production 


Year 


Price 
level 


National i»oduoti<m 


Year 


Current value 
of output 


Volume of out- 
put valued at 
1929 prices 


Current value 
of output 


Volume of oat' 
put valued at 


1919 

1920 

1921 

1922 

1923 

1924 

1925 

1928 


135.6 

166.6 

93.4 

96.3 

100.3 

94.9 

103.0 

100.4 


$62,022,000,000 
74, 494, 000, 000 
47,292,000,000 
51,219,000,000 
63,121,000,000 
60, 047, 000, 000 
65, 047, 000, 000 
68.610,000,000 


$60, 383, 000, 000 
62,069,000,000 
46,346,000,000 
52, 125, 000. 000 
«), 727, 000, 000 
58,6l6.(X)0,00o 
62,860,000,000 
66, 688; 000, 000 


1927 

1928 

1929..-.- 

1930 

1931 

1932 

1933 


94.1 
96.7 
95.2 
86.8 
72.1 
63.9 
66.0 


$66,118,000,000 
69,294,000,000 
71,290,000,000 
59,899,000,000 
44,302,000,000 
28, 287, 000, 000 

» 35, 442, 000, 000 


$66,922,000,000 
68,600,000,000 
71,290,000,000 
64, 054, 000, 000 
M, 487, 000, 000 
40,426,000.000 

149,857,000,000 



> Includes production of raw and finished commodities, construction and output of services directly related 
to production, transportation, and distribution of commodities. 
'Preliminary. 



Source: National Bureau of Economic Research, 
Pederal Reserve System. 



Not published currently. Board of Governors of th» 



In 1919 and 1920 there was a great scarcity of commodities due to 
the World War and the withdrawal of many millions of men from works 
of destruction to works of production. There was great speculation 
in such commodities and therefore the volume of money employed m 
the wholesale markets rose to an excess compared to normal. This 
speculation was suppressed by the contraction of credit and currency 
of 1921, whereupon a new speculation took place in the sale and market^ 
ing and trading of securities as heretofore explained. 

The variation in the estimate of national production, above shown, 
is accounted for by the fact that the index of industrial production for 
1929, for example, was 119; and for 1933 was 76. This made an 
important difference in the actual purchasing power of money because 
in 1929 the volume of commodities was 19 percent above normal and 
in 1933 it was 24 percent below normal. (See chapter on The Dollar 
Index and the Price Level.) 

The figures used by the National^ureau of Economic Research are 
not as extensive as are the figures employed in the more recent work 
by the statisticians of the Department of Commerce, who found thiit 
the national income was $81,000,000,000 in 1929 instead of $71,000,- 
000,000 having employed a broader basis in their estimate. For 
purposes of comparison with the amount of money eniployed, these 
differences are comparatively unimportant. The national income, 
however, as estimated b^ the Department of Commerce from 1929 to 
date, is here included with a comparison of the price level for each of 



u 



yem: that is, iek comp^^ of money eiaployed 

in tile wiioieBale coixmioditj imarkets for the purchase of 784 com- 
iiW)di<40B.K It must always pe r^emb^red that the price levels from 
1926 to date^ represents only a percentage of the $54,700,000,000 
employed in 1926 for the purchase of a fixed volume of 784 designated 
eommodities in the wholesale markets. 

The price level and noltonot income 



• 


Year 


Prio« 
level 


it».. 


95.2 


S»::. 


80.8 


mi... 


72.1 


W82..., 


63.9 


UB8 


6S.0 



National 

income 

produced > 



81,128 
68,302 
53,822 
40,014 
42,256 



Year 



1934 

1935..:.... 

1936...:... 

1937 

1938 (July) 



Prioj 

level 



74.6 
79.8 
80.6 
81.7 
79.0 



National 

income 

produced > 



60,052 
55,186 
63,466 
69,817 
> 30, 000 



\ Xn inillloiui of dollars. / 

* Katimate^ for the first half of 1938. 

Sooroe: Survey of Current Businen, June 1938. 



Board of Ooveroors of the Federal Reserve System. 



Since the income of the people of the United States determines their 
ta3q>aying power, we show a comparison of the check money employed 
Annually and the annual Government income. 

Comparison of check money employed annually and Government income 



Fiscal year ending June 



1832 
IMS 
19M 

vm 



Check 
money > 



460 
430 
470 
630 



Total 
Treasury 
receipts* 



2.1 
2.2 
3,3 
40 



Fiscal year ending June 



1036 
1937 
1938 



Check 
money > 



611 

637 

>630 



Total : 
Treasury 
receipts* 



4.1 
5.2 
6.2 



> In billions of dollars. 

* In millions of dollars. 

• Estimated. 

Souroe: Board of Oovemors of the Federal Reserve System. 

According to the estimates of the Department of Commerce of the 
national income of the people, beginning in 1929 mth $81,000,000,000 
and ending with $67,000,000^000 m 1937, it is obvious that the people 
of the Umted States^ bv virtue of the depression of 1929 and the 
collapse of bank credit, nave failed to increase their national income 
by the normal increase of 4 percent. Not only have they failed to 
increase their income by this amount, but have actually suffered a 
loss. In 1930 the loss was $13,000,000,000; 1931, $17,000,000,000; 
1932, $41,000,000,000; 1933, $39,000,000,000; 1934, $31,000,000,000; 
1936^ $26,000,000,000; 1936, $18,000,000,000; 1937, $12,000,000,000; 
making a total loss of $197,000,000,000 besides failing to gain 4 
percent per annum on $81,000,000,000, or 32 percent of $81,000,000,000 
by 1937. 

The loss of 4 percent per annum for 1930 on $81,060,000,000; 
t)ie loss of 8 percent for 1931 ; the loss of 12 percent for 1932; the loss 
of 16 percent for 1933; the loss of 20 percent for 1934; the loss of 24 
perpent for 1935; the loss of 28 percent for 1936; the loss of 32 percent 
tor 1937; and the loss of 36 percent for 1938 would make a total loss 



THAHlOVAL^mSGHKmr AND TBS 8A»lftXKQ STVCmi 40 

of 180 percent on $8i,000,000>000 equal to a lotss of $H5,a()0«Q(W«lM| 
which could have been aohoeyed under. a wiser monetary fl|y«teak^^ 
government with stable money, . ; , ; 

This makes a total loss of $197,000,000^000 plus $14S,800,0()0.000. 
or $342,800,000,000. We failed to gain $145,800,00d>000 and we 
actually lost $197,000,000,000. This demonstrates what the futi^» 
holds for America under a wiser system of stable money, stable 
business, stable capital, and stable labor. 

These figures emphasize the fatal effects of leaving the volume and 
value of money in private hands, that are moved by optimism^ and 
fear, instead of carrying out the constitutional mandate, whicfa^ 
gkve exclusive power to Congress to create money and the specifie 
duty '*to r^ulate the value thei'eof." 

If, therefore, under Government control of the money supply, an 
adequate supply of money should be provided for maximum en^ploy? 
ment and industrial production, it is perfectly manifest that the 
people of the United States will soon be enjoying great abundance^ 
ending unemployment, public reUef and pnvate charity, balancing 
the Budget, lowering taxes, and putting an end to undeserved poverty 
in the United States. This can be accomplished only by an informed 
public opinion which reflects itself in suitable legislation in the Con* 
gress of the United States. 

THE VOLUME OF MONEY EMPLOYED IN ALL ECONOMIC ACTIVITIlft 

The price level deals only with the volume of money employed ill 
the wholesale commodity markets, which comprises only a small 

gart of the volume of money employed in other fields of our economic 
fe. , 

Money is employed on a colossal scale in trading between individual 
and individual and corporation and corporation in the many stepa 
through which raw materials go in the process of production iihul 
they are finally prepared for consumption. Money is used on a vast 
scale in the purcnase and sale of real estate, and in the purchase and 
sale of all sorts of property and eqi^ties, Money is employed not 
onlv in the payment of wages and sMaries, in carrying mVentoiiei» 
and in producing commodities for the markets, but is used on a ya^t 
scale in the transportation business, and in the transmission of intelli^i 
cence by mail, telephone, tele^am, radio, and cable. It is iised oil 4 
large scale for the payment of mterests on debts, and for the piymenl 
of taxes to the Nation, the States, counties, and cities. It is iised on 
a large scale to pay for the public-utility services, water, gas, eleetncr 
lights, and power. It is used on a vast scale in the buying and seUinfir 
of securities on the various security exchanges throughout the United 
States. 

Fortunately, we have not only a knowledge of the amount of money 
employed in the whol^ale commodity markets for the purchase of 
784 different commodities but we> have positive and absolute knowl- 
edge of the volume of money used in tne transaction of all lines 6t 
business when the money is paid by check. This check money hai 
been carefully calculated witn dependable accuracy by the Federal 
Reserve Board. The figures have neretof ore been given. 

In addition to this use of money, as recorded by the checks debited 
on the books of the banks, the people have as poclcet money probably 



JbAtf ol ilia eiimikeV^ outsidid of tli« United ^totasTreas^ 

wty* > Itim total ol sueb.outataadingemmlation baa been giren^ It 
ii jMTobable Uiat the people bave aa pocket money a]>prozimately 
$3,00Q^(M)0,000; some of which is kept noarded as a savings account 
Wpeo^e who bave no bank deposits. 

The individtial turn-over of money may be daily. Where check 
money is employed in transactinj^ an active line of business, the daily 
"ifi^me may be daily used to liquidate the debts of the merchant. 
The average annual tiu^-over oi demand bank deposits, on which 
•checks are drawn, was 50 times in 1929. A small unknown portion 
of these deposits had no turn-over, being held as reserves and for 
investment. 

So that the actual turnover of those deposits, which were in active 
employment for the transaction of business, was higher than 50 times 
per annimi. 

In 1932 when the demand deposits reached a low point of about 
$14,000,000,000, the total check money turn-over was $450,000,000,- 
000^ or about 32 times per annum. Assuming that the demand de- 
posits Which were actually employed in active business were turning 
over at 60 times per annum, it would have taken only $9,000,000,000 
of d^and deposits in active circulation to have produced $460,000,- 
000,000 of check turn-over, indicating that there was at that time 
probably $5,000,000,000 of demand deposits held as reserves or for 
future investment, and thus withdrawn as an active circulating 
medium* 

At present, July 1938, the total demand deposits amount to about 
$26,000,000,000, of which about $4, 000,000 jOOO are held by the Federal 
Government, the States, and their subdivisions as money withdrawn 
for taxation and in process of expenditure. Therefore, the total 
amount of money at this time in demand deposits is $22,000,000,000, 
producing an actual turnover at the rate of $630,000,000,000 per 
annum, indicating that less than $11,000,000,000 is actively employed 
at the normal rate of fifty times per annum. 

When the money supplv contracts, the people invent credit methods 
as a substitute for the shortage of money. Under this practice the 
merchaiits and manufacturers sell their goods on a partial payment 
plan. Finance companies are established to facilitate this substitute 
for an adequate money supply. The installment plan has grown to 
l^reat proportions because of this shortage of money. Tliis system 
involves a risk and is very expensive upon customers who pay for 
. what they get, with abnormal interest. 

THE ORIGIN OP BUYING POWER 

The origin of buying power is the income received by individuals 
from wages, salaries, pensions, and investments of all sorts. Unless 
those who are consumers receive enough income from these several 
sources to enable them to buy thejr could not sell what they would be 
itble to produce. Therefore, it is of importance in the national 
economy to consider the income of consumers as vitally necessary to 
maximum production. 

When people are unemployed in large numbers it necessarily cuts 
•down production, because their labor is not utilized in the production 
of products and services. The problem is to achieve maximum em- 



KAlriONAL WCGSOUt JOfD rOB ]IA|IKIK0 SY8X«K 



M 



plojrmeni at wages and faUries^Mffieiant to enaUa all tlie plonlttafil^ 
who are also consumers, to buy the things produced, otherwise piw^ 
tiion based upon Uie profit system oannot achteye tk wmadxmMei 
abundance^' V ■ -■ ■;/^ ,- -^ ■.:-.:-:^-v/).-:-, .:\v:;t 

In this bonnectidn, the following taMb shows the etaiMnficaUc^ el tli# 
39,450,300 individuals who receiv^ incomeA for the fiscal yeat eiidil^ 
June 30, 1936: 

Distribtdwn of natumal income 



Distribution, by income groups 



$1,000 a year or 1688. 

$1,000 to $2,000 a year 

$2,000 to $3,000 a year 

$3,000 to $5,000 a year.. ... 

$5,000 to $10,000 a year 

$10,000 to $2fi,000 a year . . , 
$26,000 to fSO.OOO a year. . . 
$AO,000 to $100,000 a year. . 
Over $100,000 a year 

Total 

SUMMARY 

$2,000 a year or less 

$2,000 to $10,000 a year 

Over $10,000 a year , 

Total 



Di8trlbuti<m of 
national income 



Persons 



Percent 

46. M 

35.28 

11.34 

4.60 

1.51 

.66 

.13 

.03 

.01 

100.00 



81.82 

17. $5 

.83 



100.00 



R«oeived 
inoonte 



Percent 

18.23 

33.02 

17.85 

11.21 

6.91 

0.43 

2.06 

1.63 

1.86 



100.00 



61.25 
35.97 
12.78 



100.00 



Distrlbtttion of tiKXWM 



Indi- 
viduals 



18,368,04« 

13,020,349 

4,434,085 

1.818,960 

505,908 

200,430 

51,88? 

13,041 

5,887 



89,496,300 



32,270,208 

6,848.262 

330,740 



39,468,300 



Reoelved 



$10,806,660,000 

10,573,219,000 

iO,576,6e7»000 

6,64a,m0Q0 

^092,336^000 

8,810,611000 

1,761,851,000 

908, &5, 000 

1,005,544,000 



SO, 398, 638, 000 



30,379.879.000 

21, 313, 288, 000 

7» 666, 493, 000 



69,256,038,000 



▼ftHiial 



1,400 

lis 

3a>708 
60^ OM 

mm 



MMJJ 

8^ lit 
33^877 



1|M1.8» 



Source: Consumer Incomes in the United States, compiled by the National Resources Conunittte. 
Washington, D. C. 

It should bo obvious that the amount of money required for food^ 
clothing, and shelter per individual could not be very high where 
limited to the ordinary comforts and conveniences of a decent standard 
of living. 

The problem of maximum production so as to provide an abundanee 
of the comforts and conveniences of a decent American standard of 
living is the real problem. The above table shows that a high per*- 
centage of the American people are in truth underfed, uiidercip<^ywi. 
and undersheltered. The percentage of the pecyle who receiywt 
more than is required for the highest standard of living, and 6veia 
luxury, is very small. Those receiving less than $2,000 a jrear pet 
individual amount to 81.82 percent of the persons receiving income* 
and averaged only $941 per year, out of which the family must be 
supported. 

Individuals receiving over $10,000 a year represent only 0.81 percent 
of the persons receiving incomes. Persons receiving over $100,000 a 
year represent 0,01 percent, or 1 out of 10,000 workers, or 1 out of 
about 30,000 people. 

It should be obvious that the remedy for the disparity in inconie ii 
not to be found merely ia super taxes on the highest incomes but* ixk 
raising the incomes of the lower )t>r«Lcket8 througn the employment of 
all the people and through raising the compensation of the worfcdr» 
in the lower brackets by increased wages and salaries. It tliey are 
employed to a maximum, the wealth which they would create would 
be more than sufficient to raise the consumers buying power to a high 



If^'nOlff All noon OMT iftim 7HBI BAMKINO ST8T&M 

li|ilii|idof^^l^^ relyiiig upon punitivv flup«r Uxes on capital 



The Anierican^capttaliiit s^vtem based on the profit motive 

the great leaders in our economic life who produce throu|ii their genius 
and mi^agement need not be denied the accumtilation of great wealth, 
which of necessity passes on to ^e service of the race at the death of 
the ambitious indiyidiial. The poUcy should not be to excessively 
tax the great industrial leaders but to expand the income of those who 
are engMwd in production in the lower brackets. 

This oDJective can best be achieved through congressional control 
of the volume of money and regulating the value of money so as to 
give it the same purchasing, debt-paying power from one generation 
to another. 

Chapter XIV 



THE PROBLEM OF UNEMPLOYMENT 

The contraction of the money supply not only increases business 
iailuree wad decreases individual and Government income but results, 
in throwing millions of people out of employment compelling the 
'Oovemment to resort to vanous measures of relief and the expendi- 
ture of public funds on a colossal scale in order to protect the people 
from actual starvation and physical deterioration. 

The National Industrial Conference Board of New York, repre- 
senting the leading industrial organizations of the United States, has 
•collect information with regard to unemployment. We insert 
their table showing the number of unemployed for the years 1929 to 
date. 

Unemployment figure* — Continued. 
Annual average: 

1934 10,623,000 

1936 9,843,000 

1936 - --. 8,169,000 

1937 7,028,000 

1938(June>) 10,981,000 



Vnemployment figure* 
Annual average: 

1929 469,000 

1930 3,849,000 

1931 8,148,000 

1932 12,616,000 

1983._ 12,773,000 

« FnttmliKury. 

Bouro*: NatloiMl Indti«trl«l OonfamiM Board, Xn& 



In estimating the need for an additional supply of money to prevent 
tmemployment, these figures are of great significance, for they show 
that unemployment expands as the money supply contracts. The 
problem of unemployment is made worse by the fact that many who 
are listed as employed are employed on short hours in a limited num- 
ber of days instead of working a maximum number of normal days and 

llOUTB. 

These figures on unemployment should be compared with the price 
level, representing the volume of money employed in the wholesale 
markets. There should also be a comparison between the check 
money actually employed in these years. Students will observe that 
■as check monev went down and as the volimae of money went down 
in the wholesale markets employment went down. A table showing 
this comparison is here mserted for the years 1929 to June 1938: 



nAjmmm W(3m<mt Amsi'mm mxsmm $mmm 



Ymt 


FriM 
tev«l 


OlwekmNiey 


mmi 


Ymt 


Prtai 


OtMdtnMMy 


aunt 


19S0 


06.3 
86.$ 
73.1 
68.0 
66.0 


|1,800,OOQlOOO 

ooo^ooaooo 

000^060,000 
460,000,000 
480.000,000 


468.000 

8,840,000 

8,148.000 

13,616,000 

is; 778, 000 


IIM..^ 


74.6 
78. 8 
•&6 
81.7 
88.0 


•jgjgojj 

611«00Q^0Q» 

6I7,9B0^8M> 

*8i^O0^eOi 




ISOO 


t«t8..... 


looi 


imzis 


SutS 


1W2 

1W3 


im ..... 

i>»a«D«).. 


i4SCS 







1 Evtiinated for 1W8. 

Source: Board of OoTemoiB of the Federal Reeerve System. 

It is thus perfectly obvious that these figures demonstrate that aa 
the money supply is contracted employment is contracted and as tha 
money supply is increased employment increases. 

The remedy, therefore, for unemplo3rment is to frankly recogniaa 
the shortage of the money supply and to expand the money sup^ 
through the Federal Reserve banks by authority of the Qoyemment, 
without penalizing those who ignorantly or innocently contract our 
money supply. 

THE UNBVBN DlflTRIBUTION OF MONBT 

Naturally, in a great industrial nation where immense corpora* 
tions are built up and financed in great financial centers, theore wouU 
be a tendency to attract the accumulation of wealthand a laiger 
supply of the money of the country to such centers because the profit 
ansmg from factory production flows back to the centers where tkeia 
con>orations have their central offices. . , , 

it results therefore in an uneven distribution of the money supply 
and diminishes the purchasing power of those commimities from whom 
the purchasing power is thus withdrawn by profits, interest, insur- 
ance premiums, etc. The United States Government has, through 
its departments and its various bureaus of research, ascertained m« 
substantial facts in regard to this matter. 

The profit of a corporation is an actual withdrawal from the ult|» 
mate consumers of money held by the consumers, and such profii 
leaves the domicile of the consumer and goes to the head office of tlM 
manufacturing corporation. This profit means a transfer of local 
demand deposits to the industrial center at the expense of the money 
suppler of the consumers. Unless the farmers recdlve from consumeii 
of agricultural products a profit sufficient to supply the local moiiei;f 
needs, the buying power of the farmer is cut off to that extent, to ^<6 
injury of the city factory, depriving it of a needed market for maehlni 
production. 

In 1920 agricultural products reached a high price because of tlMi 
scarcity of agricultural products produced by the World War' aiid 
the superabtmdance of money created by the Worid War thr0t^ 
bond issues. When the contraction of credit and curr^cy took I^^ 
in 1921, it removed the factor of money abundance while the scai^# 
of agricultural products had been substantially corrected. Tml 
resulted in the market price of agricultural products falling to less 
than half of what they had been. 



M 



IIAVtOltAI^ OOQNCttfT AND 7HB BANKING BtWmU 



In 1^2 the da^Mskni ol •gricisltuM} priote wm extremelv severe* 
due to the contra^tipii of the moaey supply accompanied by an 
libundanc0 of afipiculituiltl products. 

Hie farmer always suffers in the selling price of his products more 
than th^ manufacturers because the manufactiu«r can control the 
price of his-o^m products and hold them in storage awaiting a fair 
price and can regulate the voliune of his products. The manufac- 
turers are highly organized and well financed. The farmers are not 
organijfied, are not capable of being easily organized, are not well 
financed and their products go upon the domestic market and upon* 
the foreign market m keen competition with the products of the farm- 
ers of the whole world. 

Due to these causes the farmers always suffer more in a depression^ 
than other producers. 

It is for the above reasons that the farmers shotdd be more deeply 
interested in stabilizing the value of money through the regulation 
by the Govemmeht of the volume of money. 

The farmers of the country, who represent approximately 21 percent 
of the labor of the country, have not been receiving 21 percent of the 
national income, although it is notorious that the farmer must give 
almost his entire time, from morning until night, in the cultivation of 
his fields and in the conduct of animal industry. It is of interest to 
note what the income of the agricultural classes has been in com- 
parison with the national income. For that reason there is here 
submitted a table showing the income of the farmers and stockmen, 
48 compared with the income of the Nation for the years 1929 througli 
1934. 

The national income and the income of the farmers from 1929 to 
1934, inclusive, were as follows: 



HOW THE FARMERS HAVE SUFFERED 



Ymt 


National 
inooma 


ARricultural 
income 


Percent- 
age 


Year 


National 
income 


Afn-icultural 
income 


Percent - 


1M0.... 
M81 


178,676,000.000 
72,973,000,000 
«t, 4^, 000, 000 


16,167.000,000 
4,695,000,000 
4,271,000,000 


7.8 
0.3 
6.9 


1932 

1933 

1934 


$47,964,000,000 
44,431,000,000 
49,440.000,000 


$3,192,000,000 
2,993,000.000 
3,299,000,000 


6.7 
6.7 
6.6 



When the contraction of credit and currency took place in 1921 it had 
the eflfect of depressing the price of farm commodities and the value of 
farm lands and also making it more difficult for the farmers to meet 
their debts in the form of mortgages. 

The depression of 1921 reduced the market value of the lands of the 
agricultural class $20,000,000,000. An index of the wholesale prices 
of a few of the principal farm commodities is here submitted to show 
♦!i<> manner in which all farm prices were affected by the contraction of 
<jjredit and currency (see p. 36). 

The extent to which tnose engaged in agriculture have been com- 
pelled to mortgage the farms upon which they live is shown for the 
various States m the following table: 



NATIONAIi fiXX>MOMY Am» !I%Be BAKKIN0 StitllM 



Bt»t« 



MtelMlppl..... 

Oklahoma 

Alabwsa 

Georgia 

North Dakota.. 

Loaisiana 

South DakoU. 

Iowa 

Nebraska 

Arkansas 

South Carolina. 

Texas 

Kansas 

Colorado 

Minnesota.— .\ 

Idaho 

Illinois 

Missouri 

Wiseonsin 

Montana 

North Carolina 

Wyoming 

Indiana. 

Tennessee 



f9n» - 
xttortgafed 



Ml, 000 
183,000 
»2,000 
199,000 

60,000 
135,000 

64,000 
166,000 

99,000 
186,000 
121,000 
377,000 
119,000 

40,000 
125,000 

27,000 
141,000 
169.000 
119.000 

W,000 
176,000 

10,000 
111,000 
147,000 



PtreMit 
mortfifad 



89.7 
80.4 
78.9 
78.2 
78.3 
77.6 
77.4 
77.8 
77.2 
77.0 
76.7 
76.1 
71.9 
67.9 
67.8 
67.1 
66.2 
66.1 
65.9 
64.6 
63.2 
62.5 
61.4 
60.2 



State 



CHr«goi|.^ 

Delairare.. 

Califoriiia 

Wadiimtos 

New Jersey 

Vermont 

Mkliigan 

Utah. 

Maryland 

Massachusetts... 

Ctmneetkut 

Ohio 

New York 

Kentucky 

Nevada 

Florida 

VlTflnla 

Pennsylvania... 
Rhode Island.... 

Arisona 

New Uampablre 

New Mexico 

Maine 

West Virginia... 



mnrtfuiwl 



^88 

79,000 

40^000 

liOOO 

14,000 

96,000 

16,000 

28,000 

18.000 

9,000 

1U.0Q0 

83.006 

126,000 

1,000 

96,000 

76.000 

76,000 

1,000 

6,000 

6,000 

12,000 

16,000 

96,000 



nMrtfiiii 



St 
•f.r 
«.§ 
»| 
at 



81:1 

6t« 
il.7 

44.9 
4Ct 
4I,I 
41.4 

41.1 
11.4 
Ml4 
U,l 

m 



In the above table was a very large number of terms of 3 acres or leas, whldi were not nkortgiited. Bx«i|tl 
Tfor this fact the percentage of brger farms under mortgage would have been substantially moiar. 

The total value of the brms in 1085 was about $32,000,000,000. The value In 1930 was t67,O0(MM^. 

The estimated debt on these farms in 1934 was 19,600,000,000, and because oi foredosuras and o^ar iMwad 
jtiansf^ to other purchasers of 1 4 billions, the <tebt remaining is about t8,000,000,000 for 1918. 

Source: Hearings before the Committee on Agriculture and Forestry, U. 8. Senate, 76Ui Conf., on Fam 
■Commodity Prices, June 7, 8, and 9, 1937. 

As an evidence of the uneven distribution of bank deposits we 
submit the following table, showini^ how much poorer some States 
are than others in the way of an adequate money supply to carry on 
their local business: 



Check money, by States, October 19S4 



states 


Pwoent- 
•geof 
imured 
deposits, 
in num- 
ber 


Percent- 
age of 
insured 
deposits, 
in value 


Dollars per 
capita of 
insured and 
uninsured 
demand 
bank de- 
posits 


Alabama 


99.3 
98.6 
09.0 
97.9 
98.7 
96.4 
97.4 
98.7 
98.9 
99.1 
98.8 
98.4 
99.1 
99.1 
99.1 
99.1 
98.9 
98.9 
98.6 
97.9 
98.8 
98.8 
99.0 
96.7 


69.7 
59. 
68.6 
52.6 
52.8 
50.8 
46.7 
58.6 
fiU.8 
50.6 
66.2 
37.2 
60.8 
64.9 
61.4 
68.9 
45.6 
78.6 
46.8 
88.8 
61.6 
53.6 
66.6 
44.1 


636.61 


Aritona 


46.71 


Arkansas 


38.39 


California 


133.41 


Colorado 


96.16 


Connecticut 


107.10 


Delaware 


300.08 


District of Columbia 


330.94 


Florida 


56.14 


OeoTfda. - 


30.88 


Idaho - 


46.14 


Illinois 


1S2.30 


Indiana 


86.83 


Iowa... 


69.48 


Kwsas 


70.60 


Kentucky 


17.00 


Louisiana 


M.63 


Maine 


8t.40 


Maryland 


90.98 


Massachusetts 


170. It 


Michigan 


01.00 


Minnesota _ 

Mississippi.... 


79.00 
31.10 


Missouri. 


138.33 



D(rfla«»|i«l> 
Oi^tlUof 
Insured 
bank de- 
posits 0( 

IMOOantf 
wider 






StetM 



iioiitaiui 

NAfMk*..^ 

N«ta4A *. 

N«w Hamptblr*. 

§*w Jertioy. 
•V Mexico 
•wYork 
«fthCaroUiift.. 
North DftkofU... 




loma. 



Istond.- 

b OarolliM. 

oia.. 



Dftk 
TtniMNMee 

T«»i 

VUh i. 

VttllKHit 

2r«toi»-.— - 
waAlngtdii.. 
WwtVirgliiia 

WlMiMitln 

Wyontait..... 



PiftMDt- 

Imiired 

depmits, 

inDom' 

bar 



96.2 
0«.8 
S8.2 
M.9 
dS.7 
99.0 
97.3 
99.0 
99.2 
96.9 
90.0 
90.0 

S6 
2 
99.0 
99.1 
99.1 
96.7 
96.7 
99.0 
99.1 
96.8 
90.3 
99.1 
99.0 



Piforat* 

iBWFOd 

d^Mwits, 
invaltM 



08,7 
67.7 
03.0 

>d0.6 
63.7 
83.8 
23.7 
51. 1 
78.7 
66.1 

U7.6 
63.6 
46.7 
54.0 
68.2 
71.0 
63.6 
48.6 
66.2 
84.1 
61.9 
63.6 
65.7 
66.6 
66.3 



Dollars p«r 

capita of 

insttrcdand 

ntiittsorad 

d«mand 

bankde* 

posits 



$64.64 

82.46 
83.64 
64.95 
92.65 
31.36 
406.60 
28.76 
31.33 
71.68 
69.60 
66.65 
134.20 
112.30 
21.66 
43.06 
42.14 
81.27 
65.03 
48.94 
65.99 
67.30 
47.80 
66.97 
60.67 



DoUanpAT 
capita of 
instuad 
bankd»- 
posits of 

15,000 and 
und«r 



$41.11 
47.57 
40.09 
36.69 
69.01 
20.00 
96.36 
14.69 
24.66 
40.21 
38.32 
42,25 
62.67 
60.69 
12.54 
31.53 
22.64 
39.41 
30.92 
41. 15 
34.04 
36.00 
31.40 
36.71 
41.43 



t Bidad«i titans of 1 Stata bank membnr <rf Federal Reserve STstem. 

flouroe: Hearings before the Committee ra Agriculture and Fofestry, U. S. Senate, 75th Cong., on farm 
•Ottunodity prices, June 7, 8, 0, 1937. 



, The total amount of insured demand bank deposits in small ac- 
counts of $6,000 and under in December 1936 was only 5.6 billion 
dollars. There were, roughly, 14.6 biUion dollars in large accounts 
(insured only up to the first $6,000). The 14.6 billion dollars in large 
accounts is held by only 2 percent of the bank deposits in number. 
The other 98 percent in number must get along on only 5.5 billion 
doUars to transact their business. 

It must be remembered, however, that the great corporations repre- 
sent a large number of stockholders, and that these corporations do 
employ their uninsured demand deposits in transacting their own 
business, 

. Students will observe from these tables that there is an uneven 
distribution of the money supply and that this accounts in sub- 
stantial degree for the inability of some sections and classes to buy 
freely of factory production, and therefore prevents maximum pro- 
duction by the factories of the country. 

If the Government, through Congress, was regulating the volume 
of money, the new money annually required to meet the increase in 
industrial production could be so distributed among underprivileged 
dasses ana sections, where buying power is lacking, as to build up 
gpTfidually a buying power that would be most beneficial to the ex- 
pansion of our mdustrial production in the cities. It is now generally 
recognized that the welfare of those who produce in the cities is inti- 
mately bound up with the welfare of those who produce outside of 
^6 cities; and that the success of the one is vital to the success of the 
Other. 



MOmBT IH BBLATTDlf TO DBBT v.tA 

The indebtedBess of the people of the United Statee^ govemmentM» 
corporate, and individualy is estimated varioualy at around $2fiOff 
000,000^000. It ther^ore follows that the indebtedneee of the Qov-* 
eminent, incurred during the World War when credits were expanded 
and the dollar index went down to 60, has become a greats Durd^n 
on the taxpayers, as this dollar has risen to its present piirchasing 
power of 130. The same thing is true for the debts of aU the ot^tesi 
counties, and cities. The same thing is true for the debts of corpora^ 
tions and individuals. 

The most grievous burden which afflicts the economic life of the 
people of the United States is this enormous burden of debt of the 
people to each other. It paralyzes the Nation and prevents the full 
expansion of economic Ufe. 

The increased purchasing power of money is therefore an afflicUon 
to people who have loans on their farms, or city property, or homes; 
and upon all people and corporations who have borrowed money, on 
bonds. It makes more dif&cult the payment of debt, and it has been 
proven to be grossly unfair and ruinous to the debtors. 

It has made it more difficult for the European nations to pay their 
debts to the United States. They have been compelled to humiliate 
themselves by advising the United States Government that thev were 
not able to meet the indebtedness incurred during the World War, to 
the great injury of the American people who had reUed with con- 
fidence upon the payment of the European debts to the United States. 

It has compelled the foreclosure of hundreds of thousands of mort* 
gages. 

It has bankrupted millions of people and contributed to the unem- 
plovment of the Nation. 

'the demand to restore the purchasing power of money back to 
the 1926 price level has been lustified by the relation of money to debt> 
because 1926 had a dollar wnose index of purchasing power was sub- 
stantially the same as the average dollar jiidex of 1921-29, inclusive, 
and also the same, approximately, as the average for the years^lO 14-30, 
inclusive. 

The relation of money to debt must be considered in establishing 
justice between debtor and creditor. It is an error to think that the 
creditor always profits at the expense of the debtor through the sale 
of the debtor's property, for the bankruptcy of the debtor, the destruc- 
tion of his earmng power, and the destruction of the value of the prop- 
erty of the debtor often injures thecreditor in the most serious manner. 
The interest of debtor and creditor alike will be served by restoring 
the money supply to a normal, predepression basis and thereby 
increasing the production and the iiicome of all the people. 

THE INTEREST ON nBBT 

Under the capitalist system all of the States of the Union, and the 
United States as well, have passed laws legalizing rates of interest, 
running from 6 to 10 percent. 

These rates have been made greater on the debtor in many cases by 
applying the rate discounts. They have been made greater of ten by 
charging commissions, directly or indirectly, upon the borrower* 



Ti^}^ to keep on 

4epo^t a substantial pf^H of the loan ^^^ 

liieire ate othe^^ the disadyantage of the 

borrower* This is one of the penalties which naturally now from 
turning oyer to privately owned corporations and banks the crei^tion 
of our money and a practical monopoly of our money supply ; and the 
power of the banks to contract the money supply ana thereby increase 
the burden on the debtor, whose income and whose property is 
diniinished in value by the process of oontrar ting the volume of money. 

We see the term * 'easy money" empl^ed. This term is employed 
even by our liighest officials on the Federal Reserve Board. Wliat is 
meant by * 'easy money" is merely the low rate of interest which is 
charged in New York City and elsewhere by the banks in lending 
money to the United States on the purchase of bonds and notes of 
t^ United States by the banks, or from other borrowers whose credit 
MS beyond question; it does not mean the average boiTOwer throughout 
thie United States, who has borrowed money on the farm, for instance, 
as a means of financing production on the farm, nor in the local 
factory. 

It is, therefore, of the greatest importance to observe a change 
taking place throughout the world as one of the results of the depres- 
sion^ and as one of the results of increasing intelligence with regard to 
the importance of promoting production and employment by means of 
money supplied at low interest rates. 

In this connection attention is called to the fact that Great Britain 
for over 6 years has been furnishing money for industry and commerce 
at an unbroken rate of 2 percent per annum, while the normal rate 
throughout the United States is probably three times this amount. 

Attention is called to the present current rates in Europe. The 
Federal Reserve Bulletin of November, 1938, page 1025, has a table 
on money rates in^ foreign countries. The private discount rate in 
Switzerland has been 1 percent since August 1937; in the Netherlands 
it has been 0.14 percent; in Belgium it has been about 1.60 percent; 
in France it has been 2% to 3 percent; and it has been 2.88 percent 
in Germany. 

Against these interest rates the United States must compete. 

In Canada the Canadian Government has taken over the National 
Bank of Canada and has authorized 2-percent loans to be made to the 
municipalities of Canada by the national bank. 

On page 998 of the November Federal Reserve Bulletin appears the 
followmg rates in New York for the past year: 

Prime commercial papeFhas been 1 percent and three-fourths to-4- 
percent; prime bankers acceptances have been at seven-sixteenths 
percent; stock exchange time loans have been 1% percent; stock ex- 
change call loan renewals have been 1 percent; and United States 
Treasury bills (short-term loans) had a rate of only 0.03 percent for 
the week of October 22^ 1938. 

These rates merely signify tliat the enormous accumulation of cash 
capital unemployed is being loaned in this manner at an extremely low 
rate. It does not mean tliat the ordinary man employed in agricul- 
ture, in stock raising, or in local manufacturing can borrow money for 
production and the carrying of inventories at these rates, or have anj 
assurance that such lo^ns will be carried from year to year while he is 
enea^ed in the processes of production. It is another evidence of the 
maldistribution of money. 



It pointB out that the fiiistabiU^ in ^^ m of the use of monaQr ii 
one of the most seribt^ elemeiits iiid^ inetabflity of the maoiei^ 

tary system of the Uiiited States. It deo^nistrates the importance c^ 
the Opngrees of the United States reviewinj^ the wholci Question of the 
laws fixing the rate^ of interest in the Umted Staiee ai^ oonmdenng 
the question as to jQxing a rate which will make possible the ultimate 
accomplishment of the a^Iition of debt and the payment of inteixast 
by those who are engaged in producing the commoditiee and services 
which are necessary to the enjoyment of life by the American people. « 

LABOR AND MONET _ \ 

Without money, the compensation for labor and services would 
necessarily be by barter. The labor of many people is comp^isated 
by barter in very lai^e j^art, such as the labor on the farm wher^ 
shelter and food is furnished in exchange for labor. Millions pf 
housewives and dependents in the household receive food and shelter 
in exchange for domestic services. ^ ■./::] 

The wages paid to labor by industrial enterprises are paid in very, 
lai|:e part in money, and labor is organized in labor unions with ibp 
right of collective bareaining as a means of securing a naprejust 
compensation. These labor unions are organized into the American 
Federation of Labor, the Committee on Industrial Organization, and 
in other organizations. There are many farm organizations such as 
the National Grange, the American Federation of Farm Bureaus, the 
National Educational and Cooperative Union of Farmers> and the 
National Cooperative Council (representing about 4,000 farm organi- 
zations and 1,200,000 dues-paying members). Many other organiza- 
tions exist having in view the protection of their members who labor* 

In our industrial life those who manage the capital invested natu- 
rally try to keep down the cost of the articles manufactured and; 
therefore, often drive hard bargains with those who labor, making it 
necessary for the Government to pass laws for collective bargainm^^ 
and other processes, through which labor may be better protected m 
the matter of wages and salaries and safety m employment. Labor 
suffers severely from booms and depressions, which result in millions 
of men and women being suddenly thrown out of employment and 
kept out of employment month after ^ month and year after year. In 
1932 the unemployed rose to 14 miUions and wasabout llmilUonsin 
1938. One million two hundred thousand adults are added annualljr 
to the columns of those who are qualified for labor and who need em- 
ployment. 

It, therefore; is of supreme importance that the Congress of the 
United States should have a wise monetary policy that would give 
stabiUty to the volume of money employed in our industrial ufe^ 
and by which wages and salaries are paid, and by which those who 
produce receive the money with which to buy, as consumers, the 
products of the labor of others, The volume of this money must 
constantly rise in order to supply an adequate volume to providiB a 
medium of exchange for the products and services of 1, 200,000 adidto 
annually entering the fields of labor. It is of importance not only to* 
furnish an adequate supply of mbneV through the powers of Govern-' 
ment but to prevent the indefensible expansion and contraction of 
money which results in depression and unemployment. It is of impoi^ 

12333ft— 39 5 



^ NATIONAL ECONOMY AND THE BANKING SYSTEM 

tance to have stability of employment so that those who labor shall 
receive a reasonable aimud livmg wage, and so that those who employ 
labor may make contracts which will run, not day by day or week by 
week or month by month, but from year to year with as little in- 
stability as possible. — 

The lack of stable, perm.anent employment com.pels laborers to 
demand higher prices for their labor when their employment is for 
comparatively short periods of time. This accounts for the complaint 
often lodged against labor when the labor unions fix wages at a price 
deemed too high. Such arbitrary high figures have a necessary 
tendency to prevent the building of houses for the shelter of labor. 

The national policy of Government should be directed to stabilizing 
employment. Stability of employment depends upon stability in 
the medium of exchange. There must be an adequate supply of 
money, neither too little nor too much, and only the Government 
with its financial power and legal authority can accomplish this end. 

By brain or hv brawn, practically all of the people of the United 
States labor and are producers and consumers. A man of wealth 
directs the employment of his wealth, but as a consumer he draws no 
more in food or clothing than millions who are not wealthy. The 
accumulated wealth is distributed by law as the men of wealth die. 

ABUNDANCE OR SCARCITY? 

It is a grave fallacy to believe that scarcity is unavoidable or that 
abundance for all is unattainable because scarcity afflicts millions of 

Eeople in a land of unlimited natural opportunities. Many men 
elieve and have been taught to believe by suffering that scarcity is 
unavoidable; that there is a necessary limitation on the demand for 
labor; that many must of necessity go unemployed; that, therefore, 
the demand for employment should be distributed by a fewer number 
of working days and by a shorter number of working hours. A fewer 
number of working days and shorter hours will be justified when the 
American people shall have fully developed and fully employ the 
machines their inventive genius has developed, and the power pro- 
duced through coal, petroleum, water power, and electricity. This 
objective has not been achieved. 

But until abundance for all is produced and full employment is 
provided through an adequate supply of the medium of exchange, 
the energy and intelligence of statesmen should be directed toward 
furnishing an adequate medium of exchange for the transfer of 
maximum products and services of the people to each other. 

Labor leaders have had the artful appeal made to them that a rise 
in the index of the price level means a rise in the cost of living. This 
means this argument opposes a rise in the volume of the money re- 
quired to create abundance and to create a larger volume of products. 
This argument has been shown heretofore to be entirely fallacious 
because as the money supply rises employment and wages increase . 
and of course the products increase in volume as labor increases in 
the number employed. When the volume of money and the volume 
of commodities rise together, as they do, the purchasing power of 
money remains unchanged and the average price of commodities re- 
mains unchanged as far as money is concerned. 



NATIONAL ECONOMY AND THE BANKING SYSTEM Q j 

In Loeb's "Chart of plenty," which had its origm in the Department 
of Commerce and the labor of a number of experts, it has been demon* 
strated beyond the possibility of successful contradiction that with the 
existing machinery, technological processes, manpower, organization, 
increase of electrical energy, and our natural resources the people of 
the United States could easily produce $130,000,000,000 annually, if 
they were fully employed. This chart should be studied by patriotic 
men who desire our country to reach the highest standard of hving for 
all of the people. It should be studied by those who desire to end 
human misery in the United States. It should be studied by those 
who desire equality of opportunity for the children who are daily bom 
into the world. It should be studied by those who desire the farmers 
of the United States to have a fair reward for the hard labor they 
perform. It should appeal to those who have been disturbed by the 
growth of organizations based on discontent and which not only has 
caused a widespread demand for the protection of the weak and de- 
fenseless by the Federal Government, but has also caused trie growth 
in this country of subversive organizations which regard democracy 
as incapable of giving all of the people sufficient food to live on. 

There was a great leader who proclaimed his purpose in entering 
the world that He came to bring Ufe, and life more abundantly. He 
told His disciples the first means by which to accompUsh it. As I 
remember it. He said, "Seek ye fii-st the Kingdom of God and Hia 
righteousness and all these things shall be addSl unto you." 

National prosperity and abundance cannot be founded on blind 
selfishness. It must be founded upon the doctrine which declared, 
"Thou shalt love thy neighbor as thyself." 

MONOPOLY AND MONEY 

For many decades the people of the United States have been en- 
deavoring by law to control tlie unfair exactions of monopolies in our 
industrial life. The Sherman Antitrust law imposed severe penal- 
ties for the restraint of trade by our powerful industrial organizations. 
But in the test cases brought the Supreme Court held that Congress 
only intended to forbid and penalize unreasonable restraints of trade. 
This decision imposed upon the complainant the responsibility and 
necessity of proving that the restraint complained of was unreasonable 
and left the question of reasonableness to be determined by the judic- 
iary. This made the law ineflective. Naturally, great and powerful 
combinations, with enormous capital and great resources, can monop- 
olize the supply of raw materials needed in mass production and can 
obtain special advantages in many ways which makes successful 
competition almost impossible. 

Such monopolies can fix the price of their products so that when 
depressions come and the doUai-s become very scarce, the products of 
monopoly are more costly to the consumers in terms of their own 
products, which are subjected to a severe lowering of price in the 
markets due to money scarcity. This profoundly afflicts the farming 
population of the country as well as the dwellers in the cities. 

Recently in the beginning of 1937 We witnessed the price of copper 
rise from 9 to 17 cents a pound because the supply of copper was con- 
trolled by monopoly. In tliis manner the increase of such products in 



Q2 NATIONAL ECONOMY AND THE3 BANKING SYSTEM 

price arbitrarilv had the immediate effect of obstructing the natm'al 
reaction from depression which otherwise was taking place. 

No mere monetary poUcy can prevent the copper producing com- 
panies from charging what they please. It is true that they operate 
by pubUc charter, that they employ the public mails and trans- 
portation system, and all the facilities for marketing provided by the 
pubHc and the services of other citizens. It is also true that as yet 
no pubUc control has been established to adequately control the 
abuses of monopoly, or to establish a completely fair competitive 
system. The correction of such practices and abuses lies outside of 
the question of monetary science. Monetary science must confine 
itself to the pubUc control of the volume of money and the regulation 
of the value thereof. This duty has been imposed by the Constitu- 
tion of the United States on the Congress of the United States. 

, ONE HUNDRED PERCENT RESERVES 

It has heretofore been pointed out that the power of the privately 
owned banks, State and national, to expand the money supply by 
loans and contract the money supply by liquidating the loans, or 
requiring the loans paid has been the means of repeated boorns and 
depressions in the United States, 

In order to put an end to this destabilizing influence and power, 
many economists now believe with Prof. Irving Fisher of Yale that 
the national and State banks should be required to have 100 percent 
reserves with the Federal Reserve banks against their demand bank 
deposits. The effect of this would be: 

1. The inability of the banks to cause booms and depressions by 
the indefensible expansion and contraction of credit. 

2. The absolute stability in the security of the demand bank 
deposits all of which could be liquidated instantly on the demand of 
the demand bank depositors. - 

3. By this method the banks would have perfect security against 
the possibility of any sudden demand. 

4. The banks would still have the money arising from savings 
accounts and tune deposits which they could invest, or could loan 
for business purposes. 

5. The banks would still have the right to obtain loans from the 
Federal Reserve banks or sell to the Federal Reserve banks commercial 
bills and real estate loans on long tmie. 

6. The banks of course would have the earnings from handling 
deposit accounts, both as to number and in the volume of such 
accounts. 

7. The banks v/ould have stability in tiie solvency of their borrow- 
ers and stability in the value of their investments, and would auto- 
matically cease to finance speculative operations on the security and 
commodity exchanges under a properly ordered .system. 

In addition to these advantages to the banks the United States 
would have the advantage of acquiring througli the Reserve banks 
the United States bonds, which the banks and public hold, by the 
payment of these bonds when they fall due or are sold to the Reserve 
oanks in credit of the Federal Reserve banks.^ Under this system the 
Federal Reserve banks would gradually acquire the public debt, save 
the interest on such bonds and the amortization charges, and there- 
fore greatly facilitate the balancmg of the Budget. 



NATIONAL BCONOMT AND TEm BA)IKINO 8X8nM 03 

The 100-percent reserves required against the demand bank de- 
posits would make it impossible for the banks to create an inflation 
of the money supply of the United States with its destabilizing 
influence. The banks at present have in cash and bonds a 100-percent 
reserve against their demand deposits. 

Chapter XV 

THE CALL RATE ON THE SECURITY BXCHANQES 

The call rate on the New York vStock Exchange was exempted by 
statute of the State of New York from the rule forbidding an mterest 
rate above a fixed rate in cases where the loans were $5,000 and up, 
and secured by stock market collateral. Thus, generally, there was 
no limitation on the rates of interest charged for call money. 

One of the most potent causes of the instability of credit and 
money was the uncontrolled call rate on the New York Stock Exchange, 

In tlie fall of 1907 this rate went up to 100 percent. In the fall of 
1919 it went up to 30 percent, after the Federal Reserve Board called 
upon the banks in New York to liquidate their loans from the Federal 
Reserve banks. 

The effect of this high call rate was to create the general impression 
throughout the country that money could not be obtained, even on 
call where it could be liquidated m 1 day, except at a high rate. 
Tliis naturally and necessarily disturbed the confidence of the whole 
country in the stability of our credit structure. 

The Brookings Institution published a work by Owens and Hardv 
"Interest Rates and Stock speculation" on the effect of the call 
money rate on deterring speculation, or encouraging reaction from 
depression. Tliis work demonstrated, citing six major and minor 
depressions, that a liigh rate of interest did not deter speculation on 
the stock market and did not restore credit to normal during a 
depression. 

The effect of a 6 percent rediscount rate of interest imposed by 
tlie Reserve banks in 1929 was to notify the businessmen of the 
United States through the media of the banks, that the banks could 
not obtain money from the Reserve banks and lend it to their cus- 
tomers, except at a loss, because the banks were forbidden by law to 
lend money at above 6 percent. It was estimated that it cost the 
banks 1.3 percent on the average, for making and collecting loans. 
vSo, unless they could charge at least 7.3 percent on their loans, they 
would be losing money. 

The attention of students is invited to the call rate on the New 
York Stock Exchange for the years 1926 to 1937, inclusive. 



Call rates on New York Stock Exchange 



1926 

1927 

1928 

1929 

1930 

1931 _ 

Source: Board of Oovprnoraof the Federal Reserve System. 



^ercent 
4. 50 


1932 


4.06 


1933 


6.04 


1934 


7.61 


1935 


2.93 


1936 


1.74 


1937 



Prrtent 
. 2.06 
. A. 16 
. 1.00 
„56 
. .91 
. 1.00 



04 NATIONAL JBOONOMY AND THE} BANKING SYSTEM 

While the average for 1929 was only 7.61 percent for the entire year, 
the mte actually went up to 20 percent at critical periods during the 
year, greatly destabilizing the credit structure of the United States and 
creating the impression that even on the finest security, which could be 
sold within 24 hours, the use of money was worth 20 percent per annum, 
and that money under any conditions was extremely difficult to get. 
The truth was, and is, that the United States and tlie Federal Reserve 
banks have had the power at uny time to expand the money supply to 
meet the necessities of the country by converting nonliquid securities 
into money through purchase. 

The effect of a high call rate on the New York Stock Exchange was 
to invite money from every bank in the United States, because such 
loans were abundantly protected by margin. They were easily made 
through correspondent banks in New York City and they were profit- 
able and safe. The result, however, of sucli loans was to expand 
credit indefensibly, unjustifiably, and unwisely in the security excliange 
and to make money scarce in the home l)ank, where prochiction and 
local industry had to get their money. The eft'ect also was to inflate 
the value of the securities being marketed by the great industrial cor- 
porations between 1921 and 1929. The inflation of stock prices thus 
created naturafly resulted in a crash in the stock market when the big 
operators in stocks determined to sell their stocks and the public 
finally discovered it. 

It is an open secret that in July 1929 certain great houses jnarketed 
their securities and loaned the money freely on call to less sagacious 
operators who did not realize the threatened reaction which was in 
sight to those who had greater vision. 

Thus the high call rate, foflowed by the raising of the rediscount 
rate by the Federal Reserve Board and tlio Federal Reserve banks, 
contributed to the collapse which took i)hvce in 1929 and the vicious 
downward spiral whieh followed. 

When the collapse in the stock market took place and the violent 
contraction of credit occurred, a wave of i)essiniisni swei)t the country. 
Consumption diminished within less than 12 months by 25 i)ercent. * 

The monthly Federal Reserve bulletins show all the figures as to 
the expansion and cx)ntraction of the money su])])ly and economic 
effects thereof. vStudents are referred to these bulletuis for oonfirnia- 
tion and detail. 

THK CONTUOL OP TIIK SKCUUITY RXCUANOKS 

It was the recoguition of these truths which caused the Congress of 
the United States to regulate the secin'ity exchanges by law, and to 
put the Federal Reserve ])anks under more rigid control l)y the Federal 
Reserve Board, in order to enable the Government to (leterniino the 
marghis required in stock ()i)erations, to for])i(l member banks from 
acting as agents in making loans on call for other banks, and to ixHjuiro 
the strict sui)ervision of the security exchanges. 

The old maxim "T^et the buyer beware" was modified by a new 
rule, "Lot the seller also beware." 

Tlie control of the security exchanges is tending to abate the 
recurrence of stock-market booms and crashes, and to ])artly stabilize 
the credit and business structure of the United States, but is by no 
means sufiicicnt to give comi)lete stability. 



NATIONAL ECONOMY AND THE BANKINO SYSTEM ^ 

Ohaptkb XVI 

THB INFLATION BOOBY 

It would be a grave error for students of modem monetary science 
to ignore, or to overlook, the fact that the establishment of the 
principles of modem monetary science is skillfully opposed by the 
advocates of the old system under which we have suffered. We have 
not all suffered. Some of our people have become enormously wealthy 
xmder the old system, during which monopoly has flourished and 
bull movements and bear movements have been caused in security 
eJtchanges by skillful propaganda. 

It would be unintelligent to ignore the fact that there are some 
people who know how to make money on a large scale, through bull 
markets and bear markets, and that this money is made not by creating 
wealth, but by acquiring wealth under operations in the security 
exchanges where the sagacious few know how to make money at the 
expense of others. The general public, through propaganda, is 
induced in bull markets to make the attempt to acquire wealth by 
speculation without creating it by labor and services. 

In denressions, which follow inflations, the sagacious few who have 
acquired available credit can profit by buying property below its 
normal value. 

The old system is vigorously defended. Its advocates and defenders 
fill the American press with articles dealing with the question of our 
economic life in which they attribute the evils arising under the 
existing system to many other causes than the real fundamental 
cause. Modern monetary science exposes the real cause beyond the 
})ossibilitv of doubt or successful contradiction. But the advocates 
of the old order, minimize or denounce monetary causes as being 
rcs))onsible for our national distress. The purport of these various 
articles seems to be to warn the Members of the Senate and House of 
Representatives and the people against "tinkering with the currency, '' 
against "fiat" money, against "printing press money," and against 
the dangers of "inflation." The experience of Gemiany following 
the World War is pointed out as a terrifying example, in which 
inflation resulted in the destruction of the value of bank deposits, 
boiuis, insurance policies, mortgages, and other evidences of debt, 
by reducing the German niark to zero value through the inflation 
of the Gernian n)ark billions of times. 

The term "inflation" has thus been built up as a bogey warning 
the people against any necessary expansion by using the term as 
equivalent to a defensible and necessary expansion of the money 
supply. 

These advocates of the old system (which has continuously repro- 
duced one depression after another) seem to rely upon the lack of an 
informed ])ublic opinion. They frighten the people by the bogey of 
"inflation" as if the advocates of modern monetary science proposed 
"inflation." Modern monetary science vigorously opposes "infla- 
tion." It vigorously op|)osos the "inflation" which has been employed 
by the sagacious few to profit and to acquire the wealth of the ignorant 
many. 

Modern monetary science proposes an adequate plan by which to 
prevent inflation for all time. 



05 NATIONAL BOONOHT AND THB BANKING 8TBTBM 

Inflfttion is the indefensible expanoiou of credit and currency. 
Inflation produces an unsound currency and destroys the uniform, 
permanent, debt-paying purchasing i>ower of money, which is the 
chief objective of modern monetary science. 

Both of the great political parties in the United States have ex- 
pressly promised in their national platforms and have demanded a 
^*80und currency at all hazards." 

Democratic national platform in 1932: 

We maintain that the depression of 1020 and the depression of 1929 were due 
to the indefensible contraction of credit for private profit at public ext)ense and 
we pledge the Democratic Party to preserve a sound cutrency at all hazards. 
The Democratic candidates pledge their endorsement of this platform 100 percent. 
We promise to restore property values and to endeavor to establish a dollar of 
uniform permanent debt-paying power. 

Democratic national platform in 1936: 

We approve the object of a permanent sound currency stabilized so as to 
prevent the former' wide fluctuations in value, injuring in turn^-the producers, 
debtors, and property owners, on the one hand, and wage earners and creditors, 
on the other — a currency which will permit full utilization of the country's 
resources. 

Republican national platform, 1932: 

We pledge a sound currency at all hazards. We will restore to the Congress 
the authority lodged with it by the Constitution to coin all money and regulate 
the value thereof. 

RepubUcan platform for 1936: 

We advocate a sound currency to be preserved at all hazards. 

♦ * ♦ >i( « >•> f 

We will restore to the Congress the authority lodged with it by the Constitu- 
tion to coin money and regulate the value thereof ♦ ♦ ♦. 

Progressive Party platform, 1938: 

The ownership and control of money and credit, without qualification or 
reservation, must be under public and not private control. 

Farmer Labor Party platform, 1934: 

Congress shall exercise the constitutional power to coin money and to regulate 
the value thereof. 

Modem monetary science proposes a plan to CvStablish this sound 
currency. The only sound currency is a currency whose debt-paying, 
purchasing power shall remain the same from one generation to 
another. It is a currency which shall be equally fair to the creditor 
and the debtor. It can only be obtained by the exercise of the con- 
stitutional power of the Congress of the United States to regulate the 
value of money by regulating the volume of money. 

The advocates of the old system, which fed upon inflation and un- 
sound money, have made many people believe that nobody under- 
stands what makes the value of money. Modern monetary science 
has demonstrated that this theory has no foundation of fact, but is a 
part of the propaganda which has served to prevent the establishment 
of the principles of modern monetary science, by which sound currency 
can be established and through which the indefensible expansion and 
contraction of credit shall be ended by Government power through a 
legislative mandate of Congress. Modem monetary science proposes 
a legislative mandate establishing a sound modern monetary policy 
of government, by Congress, with the machinery necessary to make 
it effective. 



NATIONAL BOONOMY AND THB BANKING BXWFBM fff 

ohaptbb xvn 

THE CONSTITUTION OF THB UNITSJD STATES ON MONBT 

One of the contributing causes of the Declaration of Independence 
was the action of Great Britain in forbidding the Colonies to issue 
momy and compelling the people to buy English money with their 
products in order to have a legal medium of exchange. 

Wlien the Colonies fought the Revolutionary War they emitted 
colonial paper money not supported by adequate law. This money 
ultimately proved to be worthless because not backed by the power 
of taxation. Nevertheless, the money issued by the Colonies com- 
prised a vital force to enable the Colonies to successfully carry on the 
War of the Revolution. 

When the Constitution of the United States was established the 
members of the Constitutional Convention were perfectly well aware 
of the importance of establishing the right to create money as a sover- 
eign right of government. They, therefore, in the Constitution 
forbade the States to create money and, broadly, through the powers 
of the Constitution, gave the right to create money exclusively to 
the Congress of the United States. And they gave explicit directions 
to Congress in article I, section 8, paragraph 5 "* * * to coin 
money and to regulate the value thereof * * *" {Legal Terider 
cases). 

The Government of the United States in the beginning was weak. 
The Members of the Senate and House did not realize the ^at 
powers given by the Constitution. The Congress contented itself 
with passing an act declaring the dollar and its decimal parts to be 
the monetary unit of account in the United States, and authorized 
the coinage of gold and silver of a given weight and fineness as dollars. 

Those who understood the power of a privatelv owned bank to 
create money, and were familiar with the Bank of England and its 
power of creating money, obtained a charter from the Congress to 
ostablisli the Bank of the United States. But the bank fell into 
- disfavor and renewal of its charter was denied. A second Bank of the 
Unite(l States was established and the renewal of its charter denied 
by the Congress. 

Individual small banks grew up out of the need of the people for a 
larger supply of money than was afforded by the currency issued by 
the Congress of the United States These banks created money in 
the form of demand bank deposits by loans and they also issued paper 
money. But Congress during the CSvil War imposed a tax of 10 per- 
cent annually upon this paper money issued by the privately owned 
banks. In 1861, under Abraham Lincoln, Congress issued legal 
tender paper money as a means of carrying on the Civil War. This 
legal tender money was a means of saving the Union. 

Lincoln thoroughly understood the constitutional right of Congress 
to exclusively create money and to regulate the value thereof. An 
abstract of liis views is given by McGeer in Conquest of Poverty. 
Tlie views of Lincoln are of surpassing importance. McGeer's 
abstract will be found in the appendix. 

Tliis power was vigorously resisted by the privately owned banks, 
and the opposition to President Lincoln were able, due to the stress 
of the war, to put through a national banking system, by which a 



gg NATIONAL ECONOMY AND THE BANKINQ SYSTEM 

national bauk, privately owned, was authorized to issue paper cur- 
rency secured by United States Government bonds. These banks 
were put under the supervisory control of the Government. 

These privately owned banks, and banks cluvrtered by the various 
States, also privately owned, became the chief source by which money 
was created in the United vStatos. These banks served the country 
well, notwithstaiuUnj; periodic depressions due to an inherent weakness 
in the system. This weakness was tlie uncontrolled power of the 
banks and their borrowers to expand and contract the volume of 
money, as heretofore described. 

In 1913 the Federal Reserve System was established, which required 
all member banks of the System to keep their principal reserves \vith 
the district reserve bank, thus concentrating the reserves in a banking 
systeni supervised by the Government through tlie Federal Reserve 
Board. 

Great powers .wore given to the Federal Reserve Board and to the 
Federal Reserve banks. 

The powers to expand credit were em])loycd thtougli these banks in 
such a maimer as to fnuxnce the World War without serious difUculty. 

Since that time, by amendments, the vSystem has been groatly 
strengthened, giving tlie Board of Governors of the Federal Reserve 
System the power to control tbe interest rate, to control the expansion 
and contraction of credit, and to dominate the so-called Open Market 
Committee. 

All money has been nuide legal tender, gold has been removed from 
our (lomestui circulation, and the Board of Governors have the power 
to buy and to sell bonds through the Federal Reserve banks. The 
Congress, notwithstanding these important improvements, has failed 
to regulate the value of money as required by the specific terms of the 
Constitution. The Congress has not passed any act instructing the 
Board of Governors of the Federal Reserve System or the Federal 
Reserve banks as to the duty of regulating the value of money, or 
laying down any standard or plan by which it could be accomplished, 
beyond imposing the duty of using the powers of the System to serve 
the interests of commerce and industry. 

President Wilson, like Lincoln, understood the constitutional power 
of Congress to create and regulate the value of money. It was due 
to him and to his administration that the Federal Reserve Act was 
passed with this broad objective. 

The Congress has given a great deal of attention to the problem. 
When the Federal RcvScrve Act was under discussion, 3,000 pages of 
testimony was taken from the leading fmanciers and businessmen of 
America. In 1024, 1920, and 1032 special investigations were made 
by the House of Representatives with regard-to regulating the value 
01 money. On May 2, 1932, the House of Representatives passed 
a bill wluch declared the monetary policy of the United vStates and the 
means of its execution. 

This act declared it to be the monetary policy of the United vStates 
to restore and maintain the purchasing power of money as it had been 
ascertained by the Department of Labor for the average of the years 
1921-29. The act further required the vSecretary of the Treasury, 
the py.deral^ Reserve Board, and the Federal Reserve banks to make 
effective this policy. 



NATIONAL ECONOMY AND THE BANKING SYSTEM QQ 

It failed in the Senate, but the study of this question by the HotiM 
has continued. There are at present pending in the Congress a 
number of bills proposing to perfect the Federal Reserve Act which 
contemplate a national monetary policy declared by Congress in 
pursuance of the Constitution. 

The present administration, under Franklin Delano Roosevelt, has 
recognized the soundness of the views of Lincoln and Wilson and 
(loclarod the great objectives of establishing a dollar whose debt-paying, 
purchasing power should remain the same from one generation to 
another, and to restore the predepression price level. These objec- 
tives can only bo achieved by clearly recognizing the constitutional 
power and duty of Congress to exclusively create and regulate the 
value of money. 

THE POWEHS OF THE UOARD OF GOVERNOH8 OP THE FEDERAL RESERVE 

SYSTEM 

The Federal Reserve Act, approved December 23, 1913, intended 
to give to the Board of Governors (then the Federal Reserve Board, 
the name was changed to the Board of Governors of the Federal 
Reserve System in 1935) supervisory power over the member banks 
of the System so as to control the ilow of credit, or the creation of 
money in the form of denumd deposits by public and private loans 
made by the banks, in such a manner as to serve the interests of indus- 
try and commerce, and to prevent the indefensible expansion and 
contraction of credit. 

It was the intention of the act to prevent the indefensible expansion 
and contraction of credit by the banks througli which booms and 
depressions arose. 

The powers to expand credit under the System were exemplified 
during the World War when the Government expanded its loans to 
the extent of $4(),q{)0,{){)0,()00 for the financing of the war, without 
disturbing the credit structure of the banks. 

The power to contract credit by the Board of Governors was set 
forth-in a letter of the Governor of the Board, W. P. G. Harding, of 
May 25, 1920, an abstract of whicli follows: 

1. Discount rates should be raised. 

2. Member banks should call loans on agricultural products, thus 
forcing the sale of such products. 

3. Member bank credits should bo restricted. 

4. Existing loans should be liquidated. 

5. Expansion of loans should bo checked. 

6. That member banks should use their power to limit the volume 
and character of loans. 

7. The Federal Reserve banks should establish normal discount or 
credit lines for each member bank and should impose graduated 
discount rates on loans in excess of the normal line. 

8. Served notice that tlie Federal Reserve banks have power to 
refuse to discount any form or class of paper. 

9. Suggested notice to the public that the Federal Reserve banks 
have the power to control and regulate credit. 

10. vServed notice to the piddic that they must economize, must 
limit demands for banking credit, and must begin to pay existing 
debts. 



70 NATIONAL ECONOMY AND THE BANKING SYSTEM 

U. Suggested that the member banks educate and impress the 
public with notice of the Federal Reserve's announced policy. (These 
11 points are taken from S. Rept. No. 1328, 75th Cong.) 

The present powers of the Board were briefly stated by the chair- 
man of the Board, Hon. Marriner Eccles, as follows: 

The primary function of the Federal Reserve System is to influence the flow of 
money and to contribute to the soundness of the banking situation. 

* 4< f * ♦ ♦ * 

Complete authority over all matters of major national policy, such as the deter- 
mination of discount rates, reserve requirements, margin requirements on security 
loans, and maximum rates of interest to be paid on time deposits, is vested in the 
Board of Governors. Authority over open-market operations is vested in an 
open-market committee, consisting of the seven members of the Board of Gover- 
nors and five members elected by the Reserve banks. 

4( 1(1 i4i * >•< >t< 4i 

The banks can create and destroy money. Bank credit is money. It is 
the money we do most of our business with, not with that currency which we 
usually think of as rhoney. 

The Board of Governors and the Reserve banks have the power to 
extend credits to the member banks, to furnish them with currency, 
and by their influence can cause the member banks to contract or ex- 
pand credit. 

The Federal Reserve Act as amended, however, had, up to the 
close of the Seventy-fifth Congress, failed to give a specific legislative 
mandate establishing a national monetary policy providing for the 
creation of money adequate to conveniently serve as a medium of 
exchange in transferring the products and services of the people to 
and from each other, or to achieve maximum employment and maxi- 
mum industrial production. 

These latter objectives were submitted to the Seventy-fifth Congress 
by various bills, such as H. R. 7230 (the Patman bill), H. R. 9800 
(the Binderup bill), S. 3800 (the Ijogan bill), and others. 

One of the powers of the Federal Reserve Board in the creation 
of money is the power to buy bonds and bankable assets through a 
committee called the open-market committee. This committee 
consists of seven members of the Board and five members chosen by 
the Reserve banks. The bills pending in Congress propose to remove 
private persons from the open-market committee on the ground that 
the question of controlling the expansion of money should be exclu- 
sively in the hands of the Board of Governors. 

These bills also propose to discontinue the so-called Federal Reserve 
Advisory Council, consisting of one member from each Federal 
Reserve bank, and having the power to advise the Board on the 
exercise of its powers, for the same reason. 

Chapter XVIII 

THE IMPORTANCK OF A NATIONAL MONETARY POLICY 

In order to carry out the constitutional duty of Congress to regu- 
late the value of money, it is absolutely essential that Congress should 
declare by legislative mandate the policy of the Government, as follows: 

That Congress shall by law exclusively create money and regulate 
the value thereof; that Congress does, by statute, set forth the manner 
in which the expansion and contraction of bank credit should be accom- 
plished; that Congress shall, by statute, establish the Board of Gov- 



NATIONAL BOONOMY AND THB BAN|CINO BTSTBll 7I 

emora of the Federal Reserve System ^ or some monetary authn^ta^, 
and charge them with the duty of usmg the Keserye banks for w» 
expansion and contraction of the supply of money; that Gongreas 
shall retain adequate control over its monetary agents; that the 
Reserve banks shall be reauired to function as they were onginally 
intended to function, as banks estabHshed in the interest of Uie 
public creation and regulation of the value of money and for the 
accommodation of industry and commerce. 

In the original act, introduced in the Senate on June 26, 1913, by 
the chairman of the Committee on Banking and Currency, there was 
.an express provision that the powers of the System should be em« 
ployed "to promote a stable price level." The language "to promote 
a stable price level" meant precisely the same as if it had been written 
"to promote a stable dollar of uniform, debt-paying, purchasing 
power." 

This language was stricken from the bill, leaving no specific legis- 
lative mandate in the bill requiiing the Federal Reserve Board of 
Governors, or the Federal Reserve banks, to pursue a policy by which 
to regulate the value of money or "to promote a stable price level." 

The omission of this language led to the unhappy results which 
produced the panic of 1921 and contributed to the more serious 
catastrophe of 1929-32. It, therefore, is now of supreme importance 
for Congress to declare a national monetary policy wliich shall be 
specific and shall give the Congress an agency through which it may 
be accomplished. 

If a monetary policy clearly defining the above objective was 
merely declared by the Cliief Executive, or by the Secretary of the 
Treasury, or ))y the Board of Governors of the Federal Reserve Sys- 
tem, it would not be enough, since a change in the Presidency, or in 
the Secretary of the Treasury, or in the Board of Governors of the 
Federal Reserve System would subject the policy to change and would 
not be so dependable as an act of Congress. Not only might the 
executive ofFicers of the Government be entirely changed m personnel, 
but they might change their opimons under the influences which 
heretofore have been so powerful a factor in the conduct of these offices. 
What the country needs is that those who are engaged in production, 
transportation, and distribution should be enabled to make their con- 
tracts with dependable security upon a fixed policy of the Government 
having the greatest pos.sible stabihty. 

It is in vain to expect a law to bo effective if it is not administered 
by those who understand it and are in sympathy with it. For that 
reason, it is of the greatest importance that the members of the 
Board of Governors of the Federal Reserve System, the Secretary 
of the Treasury, and those in charge of the 12 Federal Reserve bants 
should thoroughly understand the monetary policy and have an- intel- 
ligent comprehension as to the manner in which it may be carried 
out. It is of importance that they should not be, by virtue of their 
previous environment and training, at heart opposed to the creation 
and regulation of the value of money by the Government. As a 
condition of their service, proof of their fitness should be required and 
an adequate means shoukl be provided for their removal from office, 
witliout stigma and without technical difficulties^ in the event that 
the Congress has its confidence in their efficiency impaired. 



72 NATIONAL ECONOMY AND THE BANKING SYSTEM 

_ That these principles are well understood in Congress will appear 
from the language of bills that are now pending in Congress, such as 
the Binderup bill (H. R. 9800); in the proposed amendments to the 
Patman bill (H. R. 7230); and in the bill introduced by Senator M. M. 
Logan of Kentucky, former attorney general and chief justice of the 
State Supreme Court of Kentucky. The language of part of the 
Logan bill (S. 3800) is as follows: 

The Board of Governors of the Federal Reserve System is hereby declared to 
be the agency of the Cpngress to create money and regulate the value thereof, as 
authorized by the Constitution of the United States; and tlie individual members 
of auch Board shall hold office subject to the will of the Congress of the United 
States; and cither the Senate or the House b}' resolution may authorize and 
request the President of the United States to nominate a successor to a member 
of the Board from any Federal Reserve district regardless of the term for which 
he was appointed, whereupon, the office of such member ujjon the passage of such 
resolution shall be vacated. 

The Binderup bill and amendments to the Patnuui bill have lan- 
guage of similar ptirport. 

The Patman bill, endorsed by IGO Congressmen, also required the 
Treasury to purchase the stock in the Federal Reserve banks. The 
Binderup bill also proposed the purchase of the stock. 

The testimony taken on the Patman ])ill contained all the evidence 
necessaiy~to justify these principles of tlie Patman and the Binderup 
bills. 

The Binderup bill makes the State banks subject to the same condi- 
tions as the member banks of the Fechiral Re>:erve System, which is 
obviously a necessary principle to make the Svstem uniform. 

The importance of a legislative mandate that cannot be overlooked, 
avoided, or defeated has l)eon already sufliciently illustrated by the 
administration of the Federal Ke^cJ-ve Act since 1919. It should be 
perfectly obvious that tiic numdate in the act that the ])o\vers of the 
System sliould be employed to acconunodate commerce and industry 
has-l)een entirely ignoied by the Federal Reserve Board, and the 
Board of Governors of the Federal Resei've System, for they have 
pursued policies i-esultin^ in and permitting the absolute destruction 
of both commerce and mdustry in the past, as ])ointed out in the 
evidence taken on the Patman bill in the testimony of the author of 
this book, as well as by the testimony of others. 

Another provision of value is that the currency of the country should 
consist of one foj'm of legal-tender paper money in order to prevent 
the public being confused by the various kinds of pa})er money which 
have been i)ermitted to j)rcvail in the past. For instance, we have 
had not only the original greenbacks of Piesident Jjincoln, but the 
so-called Trcas\iry notes of 1890, and thousands of different kinds of 
National bank notes, Federal Reserve notes, Federal lieserve bank 
notes, silver certificates, etc. Simplicity, economy, keei)ing of 
records, and management woidd be simplified by one form of legal- 
tender paper money. 

A desirable bill sho\dd also j)rovide a method by which the entire 
powers of the System should he made available for the protection 
of the individmd bank against any untoward incidents that might 
happen to it, and all banks should be made subject to the same 
conditions as far as their reserves are concerned. Such a bill should 
provide for one form of examination, without cost to the banks, as a 
part of the expense of the vSystem in stabilizing the banking structure. 



NATIONAL ECONOMY AND THE BANKING SYSTEM 73 

The distribution of new money reauired annually to keep up with 
the increase of the index of industrial production should be provided 
through the Social Sec\irity organization. A propostd to this end will 
be found in <he Binderup bill. 

In considering such a bill the Congress should make a thorough 
review of the question of legalized interest rates by the member banks 
with a view to giving the American businessmen a rate of interest at 
least as low as that enjoyed by the businessmen of nations engaged in 
competitive commerce (see eh. XIV). 

In regulating the flow of money to meet the expansion of industrial 
production and the increase of population, it must be remembered- 
that there is at present a very large volume of demand bank deposits 
whicli_are held by the depositors as corporate reserves, or as reserves 
for investments by individuals. These funds may become active 
again when a fixed policy of Government is established. 

To prevent such funds expanding the medium of exchange beyond 
the point necessary to restore the predepresslon price level, the Gov- 
ernment must be prepared to contract the money supply when neces- 
sary. This can be done by reselling the bonds and bankable assets 
previously bought. It must be remembered, however, that to achieve 
maximum production would readily absorb a large part of these 
reserves when they are restored to active use as a circulating medium, • 
and or that reason this potential expansion is entirely within the 
control of the Govennnent. 

Chapteu XIX 

THE NECESSITY FOR GOVERNMENT MANAGEMENT AND STABILIZATION 

OF MONEY 

It should be obvious from the terrifying panics from which this 
country has repeatedly sulFered, especially those of the last 30 years 
(1907, '1921, 1929-32, and 1937) that the whole system of creating 
and contracting money has been uncontrolled and exceedingly in- 
jurious to the people of the United States. 

The Congress alone has the legal authority and the legislative and 
financial power to regulate the value of money. The Constitution 
broadly gave the Congress the exclusive power to create money. 
The Constitution specifically directed Congress to regulate the value 
of money. This direction of the Constitution requiring Congress to 
regulate tlTe value of money is a constitutional mandate which re- 
quires intelligent obedience by those who take the oath of office to 
support the Constitution. 

When the panic of 1921 occurred, we had 30,000 banks. Over 
16,000 of these banks have since been compelled to go out of business 
because of the impairment of the solvency of their borrowers and the 
destruction of the value of their loans and investments. 

While the banks have been of groat use to the people of the United 
States in the creation of money and in the numagement of the banking 
business, their inability to cooperate with each other — even if they 
had the constitutional right to create money — justifies and makes 
necessary the regulation of the value of money by the Congress, where 
such duty is by law imposed. 



74 NATIONAL ECONOMY AND THE BANKING SYSTEM 

When the Congress shall declare a national monetary policy which 
shall give the Nation a dollar whose debt-paying, purchasing power 
shall remain the same from one generation to another, the people of 
the United States, for the first time in their history, will have an honest 
dollar. 

The onlv honest dollar is a dollar of stable, debt-paying, purchasing 
power. The only honest dollar is a dollar which repays the creditor 
the value he lent and no more, and requires the debtor to pay the 
value he borrowed and no more. 

The people of the United States are entitled to a sound currency. 
The only sound currency is a currency .whose exchange value is the 
same from one generation to another. The failure of the Govern- 
ment to create and stabilize the value of money has not onlv resulted 
in the unemployment of millions of people through no fault of their 
own, but it has seriously changed the relationship between debtors 
and creditors, affecting contracts of over $200,000,000,000, repre- 
senting the public and private debts of the country. It has mate- 
rially changed the market price and exchange value, not only of money, 
but of all commodities and services measured by money. It has 
changed the exchange value of securities on the most colossal scale. 
It has changed the value of real estate, buildings, and equities of all 
kinds. It has rendered human labor unstable when the greatest need 
of the Nation is complete stability in the employment of all the 
people, with an annual living wage for the least of them. 

The desirability of governmental control is demonstrated by the 
fact that the control of the value of money requires the control of the 
volume of money. The control of the volume of money by expansion 
immediately produces an increased industrial production, employment, 
wages, and corporate, individual, and governmental incomes. The 
regulation of the volume of money by the Goveniment, with the intel- 
ligent purpose of giving money a stable purchasing power, will not 
only benefit the day laborer, who is entitled to an annual living wage, 
but it will benefit all workers in field, factory, and mine, and in the 
offices of the various businessmen of America. 

When the national industrial production is doubled it will result in 
many important benefits. It will enable taxes to be greatly reduced 
in percentages because the income of the country will be twice as 
much as it is now and would justify the rate of taxation being cut to 
one-half. It would put an end to public relief and charity for the 
unemployed, in large measure. Since to expand the volume of credit 
and currency should be accomplished by the purchase of Government 
bonds, it would have the effect of cutting down the interest and amor- 
tization charges on Government bonds, thereby reducing the demand 
on the Budget by approximately $1,000,000,000 a year. 

The elimination of the work for public relief and the interest and 
amortization of the bonds would make an annual saving at present of 
approximately $4,000,000,000. 

Moreover, when the Government regulates the value of money on a 
basis of stability, it would be justified in creating approximately 
$2,000,000,000 annually of new money, in the form of demand deposits, 
to be distributed where it is most needed under^the Social Security Act. 

The regulation of the value of money by creating money through the 
Government authority, and for the benefit of all the people, would 



NATIONAt ECONOMY AND THE BANKING STSTBM 75 

result a« it has in Great Britain, which in 5 years has increased its 
industrial production 60 percent and given to the country a rate of 
interest for 6 years at 2 percent per annum without a break. When the 
Government of the United States seriously undertakes the problem 
of creating the money the people require for maximum industrial 
production, it will abolish poverty in tne United States by creating a 
demand for labor at an annual living wage that will give a satisfactory 
standard of living to all the people. 

The treasure house of natural resources of the United States, the 
enormous power which now goes to waste from streams which could 
produce many times the amoimt of power the people now enjoy, is 
evidence that there is no limit to what the people can create and enjoy. 

The United States has suffered excruciatingly from underconsump- 
tion because of the stringency of the supply of a medium of exchange, 
by which alone the people can exchange their products and services 
adequately with each other. 

The experience of the last 31 years of four serious panics and 
depressions is proof positive that the banks cannot control the volume 
of money, aird that their failure to do so has not only destroyed 
thousands of banks, but has inflicted the people with great suffering. 

The Government alone can give relief. The Government alone 
has the legal authority and duty to establish and regulate the value 
of money, and to create it in sufficient quantity to serve the national 
use. It alone has the power and tlie duty to prevent either injurious 
expansion or destructive contraction. 

The creation of the money required by the people to achieve maxi- 
mum industrial production is now provided for by the Federal Reserve 
Act, as amended. Some additional amendments are necessary and 
desirable. The Federal Reserve banks, are, in effect, public banks 
under tlie supervisory control of the Congress of the United States, 
which has delegated the supervision of these banks to the Board of 
Governors of the Federal Reserve System. Under the present statute, 
the money which is now required to restore maximum employment 
can be obtained by the Reserve banks buying Goverimient bonds and 
other bankable assets to the extent required. When maximum- 
employment and industrial production is accomplished, the Govern- 
ment can prevent any excessive expansion of credit, and can reduce 
any excessive expansion of credit by the simple process of selling the 
bonds and bankable assets previously bouglit by the Federal Reserve 
banks. 

Since the country requires ap])roximately $2,000,000,000 annually 
of increased money to meet the natural expansion of i)rodiiction, this 
increase can be created by giving the United States credit with the 
Reserve banks and spending such money under the Social Security 
Act for the benefit of people who are disabled by age, sickness, or 
other incompetency. 

It is well known that the sup])ly of money in the United vStates is 
most unevenly distributed among the citizens and among the States 
as well. Therefore, in creating new money, provision should be made 
for the anniuil distribution of a portion of it among the consumers 
who otherwise may not be able to buy. 



rj:?.'$MM 30 (5 



76 NATIONAL ECONOMY AND THK BANKING SYSTKM 

Chapter XX 

THE EFFECTS* OF BTABLE MONEY 
ON THE BANKS 

Tho bankers of the United States, in spite of the weakness of tlu^ 
banking system, liave been of great service in creating credit for 
legitiinate production. ^ They have siifiored greatly because of tho 
instability of the credit structure. Over 16, 000 banks have faikul 
because of the imi)ainnent of the solvency of their borrower and 
of tlie security which they had taken from their borrowers. No 
class will be more greatly benefited by the stabilizing of money 
through a sound national monetary ])olicy than the bankers. Tliey 
will be completely protected, not only by the insurance of their 
deposits, but by tlie insurance of stability in business and a steady 
rising in the national production and income. 

Under the new system the bankers coidd earn as good or a better 
income on tlieir ca])ital and services than they have heretofore done. 
At the last knov;n estimate of the Federal Deposit Insurance Cor- 
poration there were about 50,000,000 deposits in the banks of the 
United States, If these dey)osits ])aid a dollar a month on an average, 
depending on the si/,e~oT the deposit and the activity of the deposit, 
it would ])ro(hice an income of approximately $000,000,000. These 
deposits sliouid doid)le under the new system. If the bankers received 
l)ayment for the volume of checks, on which they guarantee the signa- 
ture of the maker and of the payee, at the rate of a dollar a thousand 
it would net them, on the volume of checks debited in 1920, for 
exarn])le, $845,000,000 a year. They woidd have the right to charge 
for other services to clients. Besides these revenues the banl^s W(>uld 
have the o])])ortimity of lending or investing the money re])resented 
by savings accounts and time deposits which should, under these cir- 
cunistances, greatly increase. They could also lend their capital 
and surplus with impunity. 

Moreover, the banks coidd make long-time loans with dependable 
security on real estate, homes, apartment, and business buildings. 
They would have the additional advautage of stability in the value 
of their bonds and mortgages. Their own in vestmeiUs- would increase 
in value. 

vSo, even if tho United States should, as a part of its monetary 
policy, exercise its right to exclusively create money, the banks would 
be benefited by such a system. 

Under the new conditions of Government creation of the money 
required for the transaction of the business of the country, there should 
be an increase in industrial production and consumption, such as has 
taken place in Great Britain where the Government and banks are 
pursuing tlxe policy of managed money. 

The volume of deposits and tho business of the banks should go 
through an expansion corresponding with the expansion of industrial 
production. — 

Under the new system, governed by tho principles of modern mon- 
etary science, the banks would receive complete protection from tho 
Government against the terrifying evils of luture depressions. Thus 
the solvency of borrowers and the value of the investments of the 
banks would be given a stability which they have not enjoyed in tho 
past. 



NATIONAL ECONOMY AND THE BANKJNO SYSTEM 77 

ON MANUFACTURERS 

Stable money, with stability in business, and a steadily rising vol- 
ume of production, manufacturers would enjoy an increasing pros- 
])erity witliout fear of collapse from depression, and could, therefore, 
forecast their future and get the benefit of the savings due to maximum 
employment of their existing machinery and facilities, with otlier 
economies due to stability of production. They could afford to make 
their contracts with labor on the basis of an annual living wage, with 
benefits both to the manufacturer and the laborer. 

They woidd bo assured of a stable consuming power and a steadily 
iilcreasing demand. Their sources of supply of raw material would be 
stabihzed and made more dependable. They would be benefited by 
the lowering of the interest rate on credits required in tlie transaction 
of their business. They would be able to obtain credits to an extent 
on goods in process of manufacture and distribution which they do 
not at present enjoy. 

The wliolesaler's accounts payable, which are his income from the 
merchants and the collection of which enables him to pay the manu- 
facturer, would be stabilized, and establish tlioreby a volume of de- 
pendable credit not now available under the operation of the Federal 
Reserve S^^stem. 

ON MERCHANTS 

The stabilization and the steady expansion of business under stable 
money would be of service to the wholesale merchants and retail 
mercliants, and would enable the retail merchants to employ the 
credits they extent to customers to be used as a basis of bank credit, 
if they need it in the transaction of their business. 

ON CONTRACTORS 

Contractors could make their contracts for the future with depend- 
abk> security, knowing that the dollar would not sufl'er any substantial 
change in debt-i)aying, purchasing power. Contracts could thus be 
made for buildings and structures running over longer periods of time 
without danger to the contractors or to those who em})loy the 
contractors. 

ON CORPORATE AND INDIVIDUAL INCOMES 

Under conditions of stability in the purchasing power of money 
and in business, the incomes of the 400,000 corporations in the United 
States would be steadily increasing or made more stable. , Their divi- 
dends would be nuide more dependable. Individual incomes would be 
increased, not only through the payment of dividends by the corpora- 
tions, but by the earning power of individuals under these more 
favorable conditions. 

There are over 500 distinct avocations in the professional and 
business world that would be interested in the stabilization of business 
conditions in the United vStates. There are two and one-half times as 
many people, adidts earning their livelihood by social services, as 
there are people employed in the factories. 



78 NATIONAL ECONOMY AND THE BANKING SYSTEM 

ON AOKICULTORB 

The record proves clearly that those who are engaged in agriculture 
and animal industry suffer more severely than any other class of people 
from depression. 

When all of the people are employed and maximum industrial pro- 
duction is achieved, the people of the cities, towns, and villages will 
have the means through their wages, salaries, and dividends of buying 
an increased volume of the products of agriculture and animal in- 
dustry. This increased consumption will increase the market for 
siich products and enable the farmers to receive a return commensurate 
with the products of the farms. 

The income of agriculture and animal industry will thus be stabilized 
and the farmers will receive an adequate return for their labor, with a 
reasonable profit on the capital which thej^ employ. It should result 
in individual ownership of farms, the liquidation of their mortgages, 
the end of tenaiit farming, and the establishment of liberty-loving 
people in dependable homes in every State in the Union. 

ON WAGE EARNERS 

Under stable conditions of business, increased production and 
consumption, and imder conditions which will afford a good market 
for the employment of the labor ot wage earners and those who receive 
salaries, these classes will be able to receive a reasonable annual living 
wage and reasonable salary. 

ON TEACHERS 

It is notorious that in some parts of the United States those who 
teach the youth of America are not paid a reasonable annual living 
wage. Under conditions where the Government of the United States 
creates the money required to stabilize business, the uneven distribu- 
tion of money, employed in consumption and production, can be so 
modified as gradually to substantially increase the income of the 
pnderpaid teachers. 

It should be remembered that tlie income of the States, counties, 
and cities is profoundly affected by the money supply in the various 
States and that, therefore, »State employees and social workers, and 
even ministers of the gospel, are deeply affected by the wealth or 
poverty of the vState in which they live. 

ON GOVERNMENTAL INCOME 

The income of the United States Government is derived directly 
from taxes which are imposed on the people. These taxes are neces- 
sarily hmited by the capacitv of the people to pay. Therefore, in 
States, counties, and cities where there is an unequal distribution of 
money^ the Governments are themselves limited in paying employees. 

Dunng the depression of 1932, the United States Government 
income fell to less than one-half of what it was before. But under 
conditions of stability, when industrial production can be increased to 
twice what it is at present, the Government income would be expanded 
correspondingly, and with the cutting off of the expense of public 
relief, of interest and amortization on the public debt (proposed by 
the new system), the_- taxes on all classes of people could be greatly 



NATIONAL ECONOMY AND THE BANKING SYSTEM 79 

reduced and the services of the Goverament, the States, counties^ 
and cities could be employed in the matter of protection, education, 
health services, and other public facilities. 

ON THE CREDITOR GLASS 

Under stabilized conditions, where the national industrial produc- 
tion is increased or doubled, the creditor class would be benefited by 
the assurance of the ability of the debtor to meet his obligations. 
Therefore, the investments of the creditor class would be increased in 
the matter of stability and certainty of payment of interest and 
principal. 

ON THE SUBMERGED THIRD 

The effect of the new system would be to put an end to unwilline 
unemployment and to furnish the opportunity to all who are able and 
willing to work to make a reasonable living by their own efforts, and 
put an end to the tragic conditions where one-third of the people are 
underfed, underclothed, and undersheltered and compelled to rely 
upon public or private relief to avoid starvation and destructive 
exposure of health. 

ON THE WEALTHY CLASS 

The 2 percent of the people who might be classified as very wealthy 
would have the advantage of stability in their incomes and a very 
substantial lowering of taxes, for the simple reason that higher 
taxes would be unnecessary. The danger to the disturbance of the 
social order by a growing class of imemployed and unhappy people 
would cease. The crime which is engendered by extreme poverty and 
suffering and which often threatens the rich and their property would 
be abated and would probably almost entirely cease to exist. The 
growth of political organizations seeking violent remedies for the 
existing distress of the country would cease, and the danger from 
such sources would be ended by a better understanding and better 
conditions of life. The real estate and securities of the wealthy class 
would increase in value. — 

One of the objectives of modern monetary science is not to take 
from those who have and give to those who have not, but to create 
conditions under which those who have not shall be able to create 
for themselves the things which they need for the comforts and con- 
veniences of life, and the opportunity to enjoy the products and serv- 
ices which they themselves create. The great objective is to facilitate 
the creation of abundant wealth for all the people to enjoy. 

Chapter XXI 

THE CAPITALIST SYSTEM 

The capitalist system is based upon the sound theory that those 
who create wealth by labor, TiTventive genius, organization, and thrift 
should beentitled to enjoy fully the proceeds of their labor, sacrifice, 
and talents. 

This theory is based upon merit and reason, and yet it is also true 
that the capital acquired in this way is the offspring and directly 
derived from labor itself and that labor, which creates capital should 



gQ NATIONAL ECONOMY AND THR BANKING SYSTEM 

not bo oppressed and exploited, or reduced to severe poverty by the 
processes of organized capital; which is itself the offspring of labor. 

It has been the failure to recognize this truth which has resulted in 
the enormous disturbances of the world. When the capitalist system 
in Russia, under and because of the Romanofrs, had rendered life 
unendurable to those who labored \n the fields and factories, it resulted 
in the violent revolution of liCnin and the complete overthrow of the 
capitalist system, for the time beimr, throughout l^u^'sia, involving 
nearly 1(]5,000,000 peo[)le. This policy has been extended to some 
extent into China. 

In our own country conununism has been advo ated by grou{)s of 
peo{)lo who see no better remedy. 

Modern monetary science points out with |)reci;-ion a method by 
which the benefits of intelligent ca|)italism can be conserved, jnid at 
the same tinu? abate the harm which comes from an imperfect system 
that permits ex(;essive abuses of monopoly that luive resulted from 
an imperfect credit and banking structure in the I'uited States. 

It is unwise and unjust to broadly indict the nu)tives of other i)e()ple 
that may arise from self-interest and which j)robably ar(> without any 
ininucal or imjust j)urpose toward others. 

Under the knowledge acquired in recent years, mod(M*n moiu»tary 
science can now clearly i)oint the way to a means of doubling the 
national production of wealth by ci-eating enough nu)ncy to give food, 
clothing, permaJient family hom(»s, the comforts and conveniences, 
and even the luxuries of lif(», to all of the j)eoi)le who are willing to 
do their full part in the creation and (listril)ution of the wealth created. 
Modern monetary science ])oints the way by which the (lovermnent, 
representing all of the people, shall prevent either inflation (which is 
the indefensible expansion of credit or money) or the corresponding 
undue and indefensible contraction of credit through which the j)eople 
have suffered. 

Modern monetary science proposes a plan which the Sui)reme C .oui't 
of the United vStates has justified in its o|)ir)i()n in the Le(/(il Tender 
cases. The plan is constitutional. It is based upon the exclusive right 
of the Governr/ient to create money and the explicit duty "to regulate 
the value thereof." It does not proi)()se to take away from the rich 
that which they have acquired by law, but to enable the unemploved 
millions to be employed and to create the wealth needed for feeduig, 
clothing, and sheltering themselves out of the proceeds of their owfi 
labor. The plan proposes to end the suffering of one-third of the 
American peoj)le because of undeserved poverty. The plan is founded 
upon benevolence, justice, and righteousness. It is based on reason, 
on thoroughly well-established facts, and on sound precedents that 
cannot be disputed by intelligent men of good will and honest purpose. 

Chapter XXII 

INTKUNATIONAIi STAHIMZATION IMPltACTFCA BLK 

In 1934 the United States established a stabilization fund of 
$2,000,000,000 in gold. This fund was placed within the discretion 
of the Secretary of the Treasury as a means of stabilizing the American 
dollar in relation to the pound sterling, the French franc, and other 
foreign currencies. 



NATIONAL ECONOMY AND THE BANKING SYSTEM gj 

Groat Britain had a similar fund for the purpose of protecting the 
pound from speculative changes. France had a similar fund. 

The i(k>a was advocated in the United States that the stabilization 
fund should be emplo^yod to stablize the pound sterling and French 
franc and keep them in a constant relationship to each other. This 
conception i)rocee(UMl upon the theory that a fixed relationship 
between the ])ound, the franc, and the dollar woidd stabilize the 
pound and the franc domestically, when, as a matter of fact, nobodv 
but the French people rould stabilize the French frnnc, or the English 
people tile ])oun(l. 

Tlic French people could, of course, repeat what they did during 
the World War; reduce the franc to one-fifth of its i)re-war purchasing 
power. They expanded the franc in volume five times and diminished 
its purcluising' power to one-fifth of what it luul been. 

After the United States had changed the value of gold to $35 an 
ounce, the franc went up above 6 cents but is now worth only 2.8 
cents in terms of the dollar, less than half its dollar value previously. 
The })ound sterling, however, under a managed currency for the 6 
years since 1932 has had an index comparatively stable but rising 
substantially" to correspond in some degree with the increase in 
industrial i)ro(hiction. 

Germany has stabilized its own currency and has had no change 
in the domestic purchasing power of the mark during the last 2 years. 

None but the British people can regulate the value of the pound 
sterling, a.nd nobody but the people of the United States can regulate 
the value of the dollar. 

Notwithstanding the diminished amount of gold in the American 
dollar (59 percent of its previous amount), the purchasing power of 
the American dollar in its domestic markets has increased above the 
standard for 1920. 

Any country can destroy the value of its currency by violent 
inflation and can double the purchasing power of its currency by 
contracting credit and currency to one-half of what it had been. 

When the United States restores its dollar to the normal, pre- 
dej)ression price level of 1926 and maintains its purchasing power at 
tliat point, and provides for its expansion to correspond with the 
expansion of industrial production, it will have establi^shed a dollar of 
uniform, debt-paying, purchasing power from one generation to 
another. When this shall have been accomplished, an ounce of gold, 
which is 35 times the stabilized dollar value, will havoa stable inter- 
national exchange value and other nations may use such stabilized 
ounce of gold by fixing the value of gold in terms of their own currency, 
which they wish to maintain at a standard stabilized value. 

France, for instance, could fix the franc at 2.8 cents, by declaring 
an ounce of gold worth in francs the quotient of $35 divided by 2.8 
cents. 

Thus there would be established a temporary international stabilized 
currency between France and the IPnited States. 

But the continuance of the arbitrary price of $35 an ounce for gold 
is subject to change by will of the Congress of the United States. It 
might be changed if all other nations demonetized gold internationally. 
It might be changed by modern processes of gold extraction and the 
discovery of new and large deposits of gold which would cheapen 



32 NATIONAL ECONOMY AND THE BANKING SYSTEM 

gold and make it impossible for America to maintain its inteniational 
value at $35 an ounce. 

These considerations make it perfectly clear that there is no such 
thing as a dependable international stabilization of gold at the present 
stage of the world's history. 

THK INADKQl'ACV OF THK FOUMKH GOLD STANDARD 

For a long period of time the gold standard was rogardod as giving 
to money stability in purchasing power, on the theory that gold in its 
volume was not capable of rapid changes and the world could adjust 
itself to the slight variations of the annual production of gold not 
required in the commodity markets but employed for monetary pur- 
poses. 

For that theoretical reason, on March 14, 1000, the United States 
established the gold standard, declaring the dollar of the United States 
to consist of 25.85 grains troy weight of gold, nine tenths fine. The 
law provided for unlimited coinage of gold on this basis. It was 
supposed that this was a dependable safe standard; that it comprised 
honest money; and that nothing else was really money except gold, or 
promises to pay in dollars redcenuible in gold. This was the folklore 
of the students and teachem of political economy, with a few very 
important exceptions. It was the orthodox traditional belief that 
gold and nothing else is money except gold, or paper money as a promise 
to pay in gold dollars. 

The orthodox students of monctnr}'^ science had not yet discovered 
that this gold dollar was pegged to the American dollar used as 
currency and as check money, and that the purchasing power of the 
gold dollar went up and went down with the American dollar; and 
that, therefore, the whole world currency which dependend on the 
purchasing power of gold was really depending upon the purchasing, 
debt-paying, power of the American dollar. 

The orthodox traditional theory did not contemplate the rise and 
fall of the purchasing power of the dollar due to contraction or exi)an' 
sion, or due to the expansion or contraction of commodities. 

In May 1913 the dollar index, representing the gold dollar, had an 
index of purchasing power of 145. Under the expansion of credit due 
to the World War, and the relative contraction of connnodities follow- 
ing the war, the index of the purchasing power of the gold dollar fell to 
60 in 1920. It rose to 167 in February 1933. vSince all of the notions 
whose currencies are based on the gold standard were violently affected 
by tliis change in the purchasing i)ower of gold^ they were all compelled 
to go off the gold standard in their domestic circulation. This violent 
increase in the purchasing power of gold simply meant that the curren- 
cies based on gold suddenly had an increased purchasing power in 
tenns of commodities (the products of labor) and property, resulting 
in bankni})tcies in nuiny nations and interfering with the power of 
nations to liquidate their bonded indebtedncvss, at home as well as 
abroad. 

This change in the purchasing power of gold was due directly to the 
expansion of credit in 1920 and the contraction of credit in 1921 and 
1933. It thus has been demonstrated to the whole world that gold, 
as a monetary unit, had no stability whatever but slavisldy followed 
the American dollar, and when the IJnited States arbitrarily fixed the 



NATIONAL ECONOMY AND THE BANKING SYSTEM g3 

price of gold at $35 an ounco, the world followed and accepted inter- 
nationally the price fixed upon gold. 

All countries are now off the domestic gold standard. 

THE MODERN USE OF GOLD AND ITS POSSIBILITIES 

In the vast exchange of commodities from nation to nation through 
exports and imports, it should be taken as a fixed principle that in the 
long nm the exports and services of a nation, which establish credits 
abroad, are ])aid for by imports and services from such nations, the 
credits so established being usually employed in the purchase of goods 
and services from the im})orting nation. If such be not fully em- 
ployed in the purchases of commodities and services then the trade 
balances must be liquidated either by the shipment of securities or the 
shipment of gold. Gold has been abandoned as a circulating medium 
of exchange in the domestic business of nations, although it is still 
actively employed as a means of liquidating trade balances. For this 
purpose gold continues to be useful. 

The United States has now accumulated oyer $14,000,000,000 of 
gold in the liquidation of trade balances, financial balances, and trans- 
fers of capital. 

There is another very important use to which gold may be put, as a 
means of promoting the stability of money in other nations of the 
world. 

Wlien the American dollar shall have become stable, it would stabi- 
lize the purchasing power in the United States of an ounce of gold, 
which by statute is worth 35 times $1. 

V/licn an ounce of gold has a stable purchasing power in the United 
States, other nations throughout the world, by regidating the volume 
of currency in their domestic circulation in relation to the volume of 
their industrial production, could employ the ounce of gold for the 
purpose of stabilizing their domestic currency internationally. 

It should be remembered that the American people do not use the 
money of any other country in their domestic circulation. The only 
use they have for such mono}' is to pay in those countries for amounts 
due, for goods imported, for investments, or for the payment of 
traveling exjKjnses. 

There will always be, of necessity, daily fluctuations in the value 
of the currency of the various countries in tenns of American money, 
because of the fluctuating daily needs for such foreign currency for 
the purposes cited. This would be true even if all nations attempted 
to stabilize the purchasing power of their domestic currency. 

Nevertheless, the United States would greatly serve the welfare of 
international commerce if it stabilized the American dollar first by 
regulating the volume and value of money in relation to the American 
industrial production. In that event, the gold ounce would havfi 
stability of i)urchasing power in the United States, and other nations 
who had in similar maruier stabilized their domestic currency could, 
by the use of gold, have a comparatively stable international exchaugv*) 
without the violent fluctuations wliich have taken place in the world' 
heretofore. 

It should be obvious that the American people alone can stabilize 
the purchasing power of their own money. It should be obvious 
that the French people alone can stabilize the purchasing power of 
their own money. 



34 NATIONAL ECONOMY AND THH BANKING SYSTEM 

If another World War should take place, the world would neces- 
sarily see again the governments 'engaged expanding their currency 
because of the exigencies of war, and therefore subjecting their cur- 
rency to violent changes through such expansion. 

Such a contingency makes it the niore manifest that the United 
States cannot, through a gold stabilization fmid, or by any other 
means, regulate the value of any foreign currency. 

FOUEIGN KXCHANGE 

The value of the American dollar in its relation to the British pound 
sterling or the French franc depends upon the rclativo supply and 
demand of the American dollar in Ix)ndon and Paris. In normal times 
the demand for dollars in London or in Paris depends upon trade 
balances and the shifting from one country to another of capital or 
money. 

The trade balances between the United States and Great Britain 
depend upon the vohnne of i^ritish purchases in the United States 
and American purchases in Great Britain. When these i)urchases are 
balanced, there is comparative stability unless money or capital is 
transferred from one country to another. The factors which enter 
into this trade balance are imports and exports of conunodities, and 
also the services rendered by citizens of one country to citizens of 
another country. Great Britain receives large credits from marine 
insurance and from marine freight on commodities transported 
throughout the world in British ships. Iii addition there arc largo 
expenditures by United States citizens in Great Britain which are in 
excess of the expenditures of liritish citizens traveling in America. 

These factors affect the trade balances. 

When such trade balances are in favor of the United States an 
equilibiium is brought about by the shipment of gold to the United 
States as international money. 

But in addition to these factors there exists a very large amount 
of liquid money or liquid capital which for s))eculative purposes 
may be transferred from Europe to the United States, as during the 
inflationary boom preceding the stock-market collapse of 1929 when 
it was found that approximately $3,000,000,000 of foreign money was 
loaned in the secunty exchanges of the United States. In addition, 
during the boom tliero was still larger investments in American 
securities on the rising market, which were sold out in substantial 
part immediately before the collapse of October 1929. 

It was because of this huge volume of liquid money, controlled by 
inteniational bankers, that Great Britain and France were compelled 
to establish stabilization funds in order to offset and neutralize the 
daily instability produced by speculative transfer of this international 
funcl from one country to another. It was this international liquid 
fund of money, which could be transferred from one country to 
another, that caused the United States to estabhsli the $2,000,000,000 
stabilization fund, so that the si)eculations could be offset by the power 
of stabiHzation funds established in the United States, Great Biitain, 
and France. 

When, however, France stabilizes its own money in a domestic 
sense by regulating the flow of money in relation to the production 
of commodities and services in France?, and when Great Britain 
stabihzes its currency by the public control of credit or money through 



NATIONAL EOONOMY AND THE BANKING SYSTEM 35 

re>gulating tlie flow of money in relation to the production in Great 
Britain, and when the United States regulates, through congressional 
action, the money suj^ply in relation to the national production and 
stabilizes the purchasing power of the dollar, it maj^ then become 
possible to establish the possibility of a fixed relationship between the 
dollar, the pound sterling, and tne franc. 

But the continuance of such stability between these three currencies 
will at last depend upon the domestic action of the three Governments. 
The first step toward the possibility of international stabilization is 
the stabilization of the dollar, the pound sterhng, and the franc 
domestically, and the continuance of such domestic stabilization in 
the three countries. Domestic stabilization will diminish the op- 
portunities of s])eculation by the liquid capital of international bankers 
who have in the past speculated by transferring money from one 
country to another, rendering money more abundant in the one and 
less abundant in the other, through which j)rocess profit can be made. 
This international speculation can be and should be abated by law 
as a practice harmful to all nations who are the victims of such 
process. 

The regulation of the value of money in Great Britain has been 
accomplished by the consent and cooperation of the clearinsj-house 
banks that control the flow of credit in conjunction with the Bank of 
England. The Bank of England receives its direction from the 
Chancellor of the Exchequer, as for example: 

Tliose for whom T speak wekpiiie the freedom which we have in comparison 
with those in many other market?, but we wi«h to ii'^e that freedom in the only 
l)roper way it can be used, and that is in harmony with the Government's policy. 
I assure the Minister.s that if they will make known through the appropriate 
channels what they wish us to do in tiie furtherance of their policies, they will 
at all times find us willing with good will and loyalty to do whnt they direct aa 
though we were under legal compuL^ion. (Governor of Bank of England, October 
1936.) 

We must look very largely to the Chancellor of the P'xchcquer, and we assure 
him that in all matters his rerpiests govern the conduct of our affairs. We would 
prefer, however, that he made his requests as such rather than in the form of 
legislation. Legislation is too foreign a method. (Governor of the Bank of 
Kngland a year later.) 

And Germany and Italy also. 

In present-day Germany banks are unobtrusively given instruction from high 
above and they know better than to question the advisability of a policy thus 
recommended to them. In Italy also banks are told by the Government what 
their policy is to be and they implicitly obey orders. (Dr. Otto Hosenberg in an 
address before the Society for Stability in Money and Banking, Inc., in Minne- 
apolis, Minn., October 13, 1938.) 

Chapter XXIII 

STORM SIGNALS 

The destruction of the property values of millions of small-business 
men and millions of citizens throughout the country because of the 
contraction of the money supply has given rise to demands for the 
expansion of consumers' buying power through pensions of $200 a 
month to persons of 00 years or more under the so-called Townsend 
plan. Hundreds of thousands of people have actively espoused this 
pension plan. 



35 NATIONAL ECONOMY AND THE BANKING SYSTEM 

It was the contraction of the money supply and the suffering of 
one-third of the people for lack of food, clothing, and shelter that 
caused the strenuous campaign urged by Senator Long, of Louisiana, 

It Was the contraction of the money 8upi)ly of the people and the 
suffering caused that led to the initiative petition in California, signed 
by over 800,000 citizens, demanding a pension of $30 every Thursday 
for every unemployed person over 50 years of age. This latter plan 
proposed the issuance of scrip money by the State in disregard of the 
principle of the exclusive issuance of the money by the Congress of 
the United States. r~ . . . 

These are storm signals indicating serious public discontent with 
the contraction of the money supply and its consequences. Attention 
has been called to the demand of the representatives of the American 
Federation of Labor, the National Farmers Union, the National 
Grange, the American Federation of Farm Bureaus, and the Coopera- 
tive Council (representing thousands of farm organizations and 
1,200,000 dues-p<iying members) for a correction of the evil and the 
restoration of the purchasing power of the dollar to a normal pre- 
depression level and the maintenance thereof. 

Attention is called to the various bills, heretofore referred to, now 
in Congress demanding by the congressional regulation of the value 
of money a correction of the evils complained of. 

It will be remembered that during the dejDression of 1929-32 the 
people manufactured millions of dollars of scrip money for their own 
convenience and safety because of the negligence of the Government 
in providing the country with an adequate supply of credit and 
currency. 

Attention is called again to the party platforms promising relief, 
and yet there is still a strong campaign going on in the United States 
opposing Government control of the regulation of money on the 
ground that the Congress of the United States cannot be trusted in 
such matters. 

There is need, and great need, of an informed public opinion based 
upon reahties, facts, reason, and sound principles wliich have been 
demonstrated by experience. 

Other storm signals that are manifesting themselves in the United 
States are organizations favoring communism, nazi-i?.m, facism, etc. 
All of these organizations spring from the unmerited suffering of people 
through undeserved poverty. When undeserved poverty is ended 
by intelligent governmental action, there will be no reason, or excuse, 
for those who advocate extreme or , un-American measures. 

The intelligent democracies of the world and, particularly the 
most intelligent democracy in the world, are now charged with the 
responsibility of ending poverty in the world. When poverty is 
abolished, as it can be under the principles of modern monetary 
science, the entire human race will have an example set, through the 
cooperation of the people, that they can create and distribute for 
their own use all of the comforts, conveniences, and luxuries they 
desire. 

America is charged with the duty of protecting the greatest and 
oldest democracy m the world from the subversive influences which 
have arisen from a destructive monetary system in this country and 
throughout the world. 



NATIONAL ECONOMY AND THE BANKING SYSTEM g7 

PUBLIC OPINION AND CONGRESSIONAL CONTROL 

For many years the people of the United States have been actively 
seeking a solution for the establishment of a dollar that shall have a 
stable purchasing power. 

The panic of 1907 was followed by the Vreeland-Aldrich bill (passed 
in 1908) authorizing asset money based on sound bank assets. This 
act established the National Monetary Commission which studied 
the questions involved for 4 years, brought in a report of 32 volumes 
describing the banking systems of other commercial nations, and 
submitting a library on the subject matter of 2,500 volumes. 

The National Monetary Commission proposed a bill establishing a 
central bank governed by the member banks. 

In 1913 the administration of President Woodrow Wilson brought 
in the Federal Reserve Act, approved December 23, 1913, establish- 
ing 12 Federal Reserve banks, concentrating the reserves of the 
member banks, and establishing a system supervised by the Federal 
Reserve Board, which represented the United States Government. 

The Federal Reserve System financed the World War, raising 
$40,000,000,000, and reduced bank failures to zero in 1918. 

This act gave great powers to the Federal Reserve Board and the 
Federal Reserve banks. The power was used in 1921 to contract 
credit, resulting' in the depression of 1921. This contraction was 
corrected under the Coolidge Administration and a great expansion, 
in stocks and credit took place in the securities exchanges. This 
resulted in a stock market boom and crash in October 1929. This 
caused a niost serious depression. 

In 1932 the Banking and Currency Committee of the House of 
Representatives held hearings on bills to stabilize money, and passed 
a short bill, called the Goldsborough bill, which provided for the 
declaration of a national monetary policy to restore and maintain 
the purchasing power of money, as ascertained by the Depart- 
ment of Labor for the average of the years 1921 to 1929, inclusive. 
This bill directed the Secretary of the Treasury, the Federal Reserve 
Board, and the Federal Reserve banks to make effective this policy. 

There appeared before the committee a number of men infonned 
in modern monetary science who supported tliis bill. Representatives 
of all the great agricultural organizations appeared in support of this 
policy; the Natioiial Grange, National Farmers Educational and Co- 
operative Union, the American Federation of Farm Bureaus, and the 
National Cooperative Council (representing 4,000 farm organizations 
and 1,200,000 dues-paying members). The representatives of the' 
American Federation of Labor also approved this policy. Mr. Henry 
A. Wallace, now Secretary of Agriculture, appeared and approved this 
policy. 

The committee reported the bill favorably. The House, after 2 
days' debate, passed it by 289 to 60, 117 Republicans voting for it, 
along with 172 Democrats and Farm-Laborites. 

This bill failed to pass the Senate, the Senate substituting a measure 
to expand the national-bank currency. 

The national platforms of the Democratic Party, Republican Party, 
Farm-Labor Party, and of the Progressive Party have heretofore been 
cited with their approval of sound money under constitutional public 
control. 



gg NATIONAL ECONOMY AND THE BANKING SYSTEM 

There is the strongest reason to believe that a substantial majority 
of the Members of the House of the Seventy "fifth Congress were in 
favor of congriBssional control and regulation of the volume and value 
of money. The matter is being debated on the hustings throughout 
the United States. A large number of speeches were made on tlie 
floor of tlie House urging this reform. Study clubs throughout the 
country are giving attention to this matter. 

So there is need for an informed public opinion upon this question. 

Twelve hundred thousand young men and young women arrive at 
age annually whose future is clouded by the existence of 10 or 12 
million unemployed people, arising from a failure of the Congress to 
discharge its constitutional duty to create and regulate the value of 
money. 

The facts and principles set forth in the i)receding pages are intended 
to aid the young men and women of America to understand this ques- 
tion and to guid^ future public opinion. The responsibility is upon 
them in part to perform this patriotic service. The time has come t^ 
end the underserved poverty of one-third of the American people. The 
time has come to raise the national i^roduction to a maximum sufficient 
to give all of the people of thC) United States an abundance of food, 
clothing, shelter, leisure, and education, and permanent comfortable 
family homes. 

To this task this book summons the youth of the country for their 
own sake, and for the sake*of the future of America. 



APPENDIX 



Glossary 



Booms. — Where property prices rise above normal by the uide- 
fensible expansion of credit and currency. 

Creditor. — One who holds the bonds or obligations of another pay- 
able in dollars; a bondholder; a holder of bills receivable; a bank 
depositor; whether a government, corporation, or individual. 

Debits. — Are charges against a demand deposit and represent the 
volume of dollars emplo^yed by the people of the country through 
checks drawn and paid m the transaction of the national business. 
The volume of such checks debited in the standard year 1926 was 
$845,000,000,000. 

Debtor. — One who owes a bond or bills payable, or obligation of debt 
to a creditor in whatever form, secured by mortgages, collaterals, or 
unsecured; whether goveriiment, corporation, or mdividual. 

Deflation. — The defensible contraction of the inflated credit and 
currency of a previous hiflation. The indefensible contraction of 
credit and currency cannot be called deflation with propriety. Defla- 
tion is defensible contraction, not indefensible contraction. 

Depressions, — Where property prices fall below normal due to the 
indefensible contraction of credit and currency. 

Extrinsic, — It is the exchange value for a legal-tender currency note, 
as, the paper and ink on which it is printed haying no intrinsic value. 

Hoarded money. — Consists of demand deposits held as reserves, or 
for future investment purposes and which are not employed as a 
medium of exchange, but can be so employed at the option of the 
owner. Hoarded demand deposits have the effect of contracting the 
money supply available as a medium of exchange. Currency hoarded 
likewise is a contraction of the money available as a medium of 
exchange and can result in compelling the })eople to manufacture 
their own money in the form of scrip money, as in 1932. 

In drcnlation. — Demand bank dej)osits in circulation are those 
actively employed in the daily transaction of bushiess. A demand 
deposit under one account may, to a high percentage, be a demand 
deposit representing reserves and money held for future investment 
while only 10~percent of such <lemand deposits may be actively 
employed in the (laily transaction of bushiess. The ledgers of a bank 
do not differentiate between a demand deposit which is 90 percent in 
storage and 10 percent active. Therefore the amount of money in 
circuhition must be ascertained by the volume of checks debited 
against the demand deposit and otherwise may be ascertained by the 
volume of money required to buy the commodities listed by the 
Department of Labor in ascertainhig the price level. 

89 



90 NATIONAL ECONOMY AND THE BANKING SYSTEM 

IndefensiMe coniraeiion, — Where the contraction of credit and cur- 
rency deprives the people of a sufficient quantity of money to exchange 
the maximum products and services of the people. 

Indefemible expansion, — The expansion of credit and currency above 
the quantity required for the convenient exchange of the products and 
services of the people. 

Index numbers. — These are employed for purposes of comparing one 
year, month, or week with another. Usually the index is put at 100 
so that the mind can quickly grasp an increase or decrease from the 
normal standard by percentages; such as the index of the price level, 
the purchasing power of money, the indexes of car loadings, factory 
production, factory pay rolls, factory wages, etc. 

Inflation . — An indefensible expansion of credit and currency. An 
expansion of credit and currency beyond the requirements for the 
exchange of the maximum products and services of the people. It does 
not mean defensible expansion where the money supply is subnormal, 
or below the afnount required for the maximum exchange of products 
and services by the people. 

Intrinsic. — It means a value in the commodity itself, as the gold in 
a gold coin, or silver in a silver coin. A $10 gold piece has a certain 
amount of intrinsic value besides the monetary value which at one 
time was granted by law. A legal tender $10 bill has no intrinsic 
value but an extrinsic value of $10. 

Legislative mandate. — A declaration by the legislative power of a 
policy or instruction. 

Maximum employment. — The employment of the greatest number of 
persons able and willing to work employed in the activities of a 
country. 

Maximum production. — The highest volume of products of which a 
country is capable through manpower and machinery^. 

Money. — Anything by conventional use employed as a medium of 
exchange and measure of value, whether currency, bank checks, or 
bank deposits in circulation. Savings accounts comprise money in 
storage but are not money employed as a medium of exchange. 

Monetary policy. — The national policy governing the flow and value 
of money and/or the means for accomplishing such objectives. 

Orthodox economist. — One who believes in the tradition of the gold 
standard as the only sound currency. 

Paper money. — It is legal tender in the United States, issued by the 
Government of the United States exclusively. It is receivable for all 
debts, public and private, and superior to gold, which is not legal 
tender m the United States. Its exchange value depends upon the 
necessity for its use in the payment of taxes, fixed charges, and the 
transaction of business. 

Products and services. — This term is used to indicate the amount of 
products and services of labor exchanged by the people with each other 
annually. 

Purchasing power. — "Purchasinjj power" means the ability of the 
consumers to buy and pay for desired goods and services. 

Scrip money. — An obligation to pay issued by a corporation or 
individual and redeemable by the issuer. Scrip issued by cities 
receivable for taxes. Scrip issued by stores redeemable in mer- 
chandise, etc. 

Sound currency. — Legal-tender currency of uniform, permanent, 
debt-paying power. 



NATI014AL BCOI^OMY Am> THB BANKING SYSdMM ji| 

StahUUy. — It means stability in tl^e value of projperty and mpi^^, 
which measures the value of property. The stability of money is the 
only basis upon which stabihty of property can be secured. j 

turn-over, — The turn^over of money in circulation is the nun^ber 
of times it turns over per anniun. The turn-over of demand deposits 
employed in actual circulation is the number of times such deposits 
are employed per annum by transfer from one to another, as in 1929 
when the total volume of demand deposits was estimated to have 
had a turn-over of 60 times per annum. 



Lincoln's Monetary Policy 

Money is the creature of law and the creation of the original issue of monejr 
■houtd be maintained as an exclusive monopoly of National Government. 

Money possesses no value to the State other than given to it by circulation. 

Capital has its proper place and is entitled to every protection. The wages of 
men should be recognized in the structure of and in the social order as more im-' 
portant than the wages of money. 

No duty is more imperative on the GovernmenHhan the duty it owes the pepplef 
to furnish them with a sound and uniform currency, and of regulating the oiroular 
tion of the medium of exchange so that labor will be protected from a vicious cur- 
rency, and commerce will be facilitated by cheap and safe exchanges. 

The available supply of gold and silver being wholly inadequate to permiii this 
issuance of coins of intrinsic value or paper currency convertible into coin in the 
volume required to serve the needs of the people, some other basis for the issiie of 
currency must be developed, and some means other than that of convertibility 
into coin must be developed to prevent undue fluctuations in the value of paper 
currency or any other substitute for money of intrinsic value that may come into 
use. 

The monetary^ needs of in6reasing numbers of people advancing toward higher 
standards of livmg can and should be met by the Government. Such needs can be 
■erved bv the issue of national currency and credit through the operation of a 
national banking system. The circulation of a medium of exchange issued and 
backed by the Government can be properly regulated and redundancy of issue 
avoided by withdrawing from circulation such amounts as may be necessary by 
taxation, redeposit, and otherwise. Government has the power to regulate the 
currency and credit of the Nation, 

Government should stand behind its currenov and credit and the bank depK>site 
of the Nation. No individual should suffer a loss of money through depreciated 
or inflated currency or bank bankruptcy. 

Government possessing the power to create and issue ourrencv and credit as 
money and enjoying the right to withdraw both currency and credit from circula- 
tion by taxation and otherwise, need not and should not borrow capital at interest 
as the means of financing governmental work and public enterprise. The Govern- 
ment should create, issue, and circulate all the currency and credit needed to satiih 
fy the spending power of the Government and the buying power of consumers. 
The privilege of creating and Issuing money is not only the supreme prerogative 
of Government, but it is the Government's greatest creative opportunity. 

By the adoption of these principles, the long-felt want for a uniform medium 
will be satisfied. The taxpayers will be saved immense sums in interest, dis^ 
counts, and exchanges. The financing of all public enterprise, the maintenance' 
of stable government and ordered progress, and the conduct of the Treasury wiU 
become matters of practical administration. The people can and will be fur- 
nished with a currency as safe as their own Government. Money will cease to be 
master and «become the servant of humanity. Democracy will rise superior to 
the money poWer. 

(The above is an abstract of Lincoln's monetary policy from Mayor 
McGeer's Conquest of Poverty and has been certified as correct by 
the Legislative Reference Service of the Library of Congress at the 
instance of Hon. Kent Keller, Member of the House of Representa- 
tives.) 

123338-^-39 7 



Chabt No. 1.— 


-MenHary duuri exhaSAHng cspaimon and wninuHon wUh retu&t, IdiS-Bi 










WibRS admlnintration 


Harding and Cooiidge administnOQai 




1018 


1014 


1915 


1916 


1917 


1918 


1919 


1920 


1921 


1933 


i«e 


oat 


L Total baate» 


35^903 
4.3 

i7."2' 


20,765 
4.4 

15.3 

5.5 

18.1 

--- 


37.062 

4.5 

15.7 

5.8 

18.8 

i"6' 


27,513 
4.6 

18.0 
6.6 

22.3 

i'i" 


27,923 
4.9 

30.5 
7.8 

25u8 

iT 


38,880 

5l0 
22.4 

9.4 
27.5 

^4."2' 


20,123 

5.3^ 

24.7 

1L8 

32.4 


6.0 

30.8 

ia8 

37.0 


30,812 
6.4 

20.0 
ILO 
34.5 

i'e" 


90,388 

6.8 

. 37.8 

12.3 

36.8 

i"3' 


aaiTS 

6.8 
30.4 
18.8 
30.8 

"iri" 


30^818 

7,1 

81.8 

18.8 

43.1 


3. Totia capital > > ^ 

3. Totalloaasi > :! 

4. TotalinTestmeTitst) _ 

5. Total ^posits i » 

6. Total draoand bank deposits (exdudii^ inbb'c 

toiids}i> _ _ 

7. Usitod States cmroicy in ciTculation » * 


8. Cbocia cashed (per aninun) by all banks** 




9. Commodity index (pric^leTel) 

M- rtoUarfndM . . 

IL Index, ^yrical products 

12. Unempjoyment *.. „ . „ 

lA Tpdex c*i-Mw1ing^... .. 


69.0 

L449 

38.9 


67.4 

L484 
38.8 


68.3 

L464 

4a6 

22,"i56" 
3.6 
L8 

ToTs' 

30.5 
0.7 


82.9 

L206 

47.5 

""i6,'9M' 
5.5 
2.4 

k'2 

42.2 

0.8 


122.0 

0.820 

56.2 

isTsss" 

6.2 
3.0 

isl'o" 

45.5 
LI 
0.6 


120.0 

0.775 

6S.6 

6.1 
3.0 

i4a2' 

49.9 
3.7 
L6 


135.6 
0-737 

7a7 
"ii' 

63 

6,451 

7.9 

3.9 

imTo' 

54.5 
&2 


166.5 

0.601 

78.7 

L4 

91 

63 

8.881 

8.2 

5.3 

m'l' 

66.3 
6l7 
3.3 


93.4 

L071 

65.6 

4.2 

79 

56 

19,652 

4.5 

2.5 

80."6" 

6L4 

5.6 

2.1 


96.3 

L038 

60.9 

3.4 

87 

79 

23,678 

3.8 

3.1 

54.0 
4.1 
L2 


loas 

0.997 

79.8 

L5 

100 

81 

18, n8 

1 8.8 

"96.T 

82.7 

4.0 

L2 


M.9 

L«4 

81.8 

3.8 

07 
M 

aa<i8 

46 
JL« 

"948 
80.4 

40 
Ql8 


14. Ckffistractioa contracts 

15. Namba-ofo(Hiimerrialfuliires 

16. Exports* 

17. Imports ». _ 

18. Total -ralae common stocks** 

19. Index £um products..--.. .- . 

20. Valoe oC farm lands » 

3L Iteararyieedpts*^ 

22. Total rescTTe bank credit • 


L8 

60.T 
38.4 

a7 


2.1 
L8 

■"^"7L6" 

39.6 

0.7 







I The first 7 lines relate to June 30 only. 

* !&idlcates billions and decimals thereof. 

'This record b^ins in 1927. i 

The above figures are from Federal Beeerre Board records. 



* This record begins in 1929. 

* Indicates mUlitms or decimals thereof. 

* This record begins in 1925. 



Chabt No. 2. — Monetary chart exhibiting expansion' and contraction vnth re«wtt«, 1925-SS 





Coolidge administration 


Hoover »]ministratlon 


Boosevelt adminii^xatioB 




1925 


1926 


1927 


1 

1928 


1929 


1930 


1931 


1932 


1933 


1834 


1B88 


urn 


JUNK 30 

L Total banks _ 


28,841 

7.4 

33.9 

14.9 
45.9 


28,146 

7.8 

36.2 

15.4 

47.9 


27.061 

8.3 

37.4 

16.4 

49.4 

23.4 
4.8 


26,213 

8-9 

39.5 

17.8 
5L4 

23.3 
4.5 


25,330 

9.5 

4L5 

16.9 

50.5 

214 

4.5 

L230 

95.2 

L050 

100.0 

L8 

106 

117 

21909 

5-2 

4.4 

77.3 

103.3 

47.8 

4.0 

L4 


24,079 
10-0 
40-6 
17-5 
SO- 5 

212 

4-2 

900 

86-8 

L1S2 

918 

4.7 

92 

92 

28,365 

3-8 

3-1 

63-9 

88-9 

47-8 

4.2 

LO 


21071 

9.5 

35.4 

19.6 

47.6 

19.5 

4.5 

660 

711 

L387 

7S.5 

8.7 

75 

63 

28,285 

14 

11 

47.4 

65.4 

43.7 

3-3 

.9 


19,163 

8.1 

27.8 

18.2 

38.5 

14.9 

5.4 

450 

63.9 

L565 

6L5 

13.1 

56 

28 

3L822 

L6 

L3 

15.6 

45.7 

36-8 

11 

13 


14,624 

6.9 

212 

17.9 

34.2 

14.0 

5.4 

430 

6&0 

L538 

67.2 

13.7 

68 

25 

20,307 

L7 

L4 

36.3 

53.3 

X.3 

12 

13 


16^894 

7-4 

2L43 

2L3 

36.9 

15.8 

5.4 

470 

74.8 

L340 

63.8 

113 

83 

32 

11185 

11 

L7 

34.4 

83.3 

8L0 

3.3 

16 


18,083 

7.3 

2013 

24:1 

4L3 

1IL9 
&« 

530 

79.8 

L253 

9L0 

US 

63 

37 

U,«T9 

13 

10 

3&3 

78.3 

318 

4.0 

14 


i5b«e 


1 Total capital i 




3. Total loaiTis * 


aai 


4. Total iavestments i 


»-8 


5. Total deposits ^ 


46.9 


8. Total demand bank deposits (exdadisg public 
foBds) 


318 


7. United States coxrency in circalation i 

S. Checks cashed (per annuin) by all banks ^ 


4.5 


4.6 


&3 


». Cammodity index (priceleve^ 

10- lioHw index . . , -. 


IOS.0 

.971 

86.4 

1.7 

1(» 

122 

21,214 

4.9 

4.2 

29.7 

109.3 

40.4 

3-8 

LI 


100.4 

.971 

91.1 

1.6 

106 

129 

21,773 

4.8 

4.4 

35.6 

100-9 

49-0 

4.0 

L2 


94.'i 

1.063 

93.4 

10 

103 

129 

23,146 

4.9 

4.2 

410 

96-5 

47.6 

4.1 

LI 


96-7 

L034 

96-0 

12 

103 

135 

23,842 

6.1 

4.1 

519 

106.7 

47.4 

4.0 

L6 


80.8 
l.S(l 


11. Index, physicalproducts. 


109.0 


11 Unemployment'.. ._ 

13. Index carloadingg,,, 

14. CoQstraetion coDDacts-. 

15. Nunibn'4>fonniiivnrciatfai]nreR 


ma 

73 
81 


16. Exports^ „ „ 

17. Imports » 

18. Total Talne of common stocks^ 


48.9 


19. Index fann products „„_ 

an. Vaine fnrm IttiHis 1 ... ^. 


W.2 


2L Treasury leoeipts i 


-.-_.- 







i Indicates billions and decimals tlwreoL 

« Indicates millions w dedmals thereof. The above figures are from Federal Beserve Board records. 

s The imports Hot the atonth of September 1936 were 2l6,00(yX)0. The exports for the month of Septonber 1936 v»e 220,000,000. Below these lino, the iadesntewcei an to 
the yeais invdved, eixoqE>t 1996. The diedcs ea^ed pw annnm mdade from laniury to December as to the indexes f^ 

Non.— Li July 1936 about 10,500,000 of pecaons oat of 51000,000 of employables woe still unemployed (estimated)* Ordlnatily, total bank deposits iadnde pobUe taaSM, hot 
not in this chart. The above flcwes represent expansion and contraction of credit and cntrency—money. 



94 



KATIONAJC BCONOUT AND THE BAKKXNQ dtStBSM 



TlididlloiHiig ^^ of Reseaii^h of the 

Boahl of QoYd^tB j^f thie Fedti^ and shows the 

Important relationship between the volume of money, as indicated 
by bank debits in 14 1 centers; and the factors listed, particularly 
factoiy employment; Since the figures are ^ven by months^ it will 
be seen how closely employment and production follow the expansion 
and contraction of money. The hank debits also indicate the amount 
of demand deposits in actual circulation, because these checks are 
debited onl^r against demand deposits in circulation, not upon demand 
deposits wmch are hoarded and frozen. 

The relationship of the money supply and the circulation of money 
by checks has been dealt with m detail throughout the book, so that 
it is not necessary to repeat the argument, although this table em- 
phasizes and makes clear the validity of the argument that national 
employment and production depend strictly upon the volume of 
money in circulation. 

Seleded aeries on buaineaa activity 
[Date without seasonal adjustment unless otherwise specified] 



Year and month 



1920 

1W7 

1928 

1929 

1930 

1981 

1982 

1983 

1934 

1938 

193« 

1987.. 

1920 

January 

February 

March 

April 

May 

June — 

July 

August 

September.... 

October 

November.... 
December 

\ 1927 

January 

February 

March 

AprU 

May 

June 

July 

"August 

September.... 

October 

November.... 
December.... 



January. 
February. 
Marcb.... 
AprU 



1928 



It 
k 



Is 



108 

106 

111 

119 

96 

81 

64 

76 

79 

90 

106 

110 

106 
106 
106 
107 
106 
106 
108 
110 
111 
HI 
110 
107 

107 
108 
110 
108 
109 
107 
106 
106 
104 
102 
101 
102 

107 
100 
108 
108 



101.7 
99.6 
99.7 

106.0 
92.4 
78.1 
66.3 
73.4 
86.7 
91.3 
97.8 

106.8 

102.7 
102.4 
102.0 
101.7 
101.1 
101.3 
101.0 
101.6 
102.0 
102.0 
101.4 
lOl.O 

100.4 
100.8 
100.4 
100.2 
100.1 
100.1 
99.7 
90.6 
99.1 
98.4 
97.9 
97.4 

97.8 
97.8 
97.9 
97.7 



100.0 
96.4 
96.7 
96.3 
86.4 
73.0 
64.8 
66.9 
74.9 
80.0 
80,8 
86.3 

103.2 
102,0 
100.6 
100.3 
100.6 
100.4 
99.6 
99.1 
99.7 
99.4 
98.4 
97.9 

96.6 
96.8 
94.7 
94.1 
H2 
94.1 
K8 
96.2 
96.3 
96,6 
96.3 
96.4 

90.4 
95.8 
96.6 
90.6 



Security prices 



Capital issues 
(millions of dollars) 



S 



106.0 
108.2 
106.4 
102.0 
105.7 
103.6 
98.6 
102.6 
103.6 
106.1 
107.0 
104.4 

lOSTl 
106.0 
106.0 
104.3 
104.7 
104.7 
104.6 
104.2 
104.3 
104.6 
105,4 
106.2 

106.9 
107.3 
108.9 
109.1 
109.7 
109.2 
106.8 
107.3 
107.6 
107.7 
108.6 
109.3 

109.1 
108.9 
109.3 
108.8 



I 

11 

S 



97.6 
100.7 
100.8 
98.0 
99.3 
90.9 
69.6 
73.4 
84.6 
88,6 
97.6 
93.4 

96.0 
96.6 
96.3 
97.4 
98.1 
98.2 
97.7 
97.6 
97.7 
97.6 
98.6 
99.0 

99.7 
,99.6 

ioo.i 

100.6 
100.6 
100.0 
100.0 
100.9 
101.3 
101.7 
101.9 
102.2 

102.3 
102.2 
102.1 
102.1 






100.0 

118.3 

149.9 

190.3 

149.8 

94.7 

48.6 

63.0 

72.4 

78.3 

111.0 

111.7 

101,8 

101,8 

96.8 

92,9 

03,2 

97.2 

100.0 

102.9 

104.3 

101.6 

103.1 

105.4 

106.6 
107.9 
100.1 
111.1 
114.2 
116.4 
117.2 
122.0 
127.7 
126.7 
120.6 
133.1 

134.4 
132.3 
137.9 
145.9 



7,369 
9,774 
9,898 
11,613 
7,619 
4,038 
1,761 
1,063 
2,160 
4,699 
6,214 
3,878 

728 
639 
661 
655 
662 
714 
684 
343 
489 
672 
7,00 
622 

951 
941 
662 
885 
960 
942 
456 
608 
697 

1.011 
733 

1,028 

762 

863 

900 

1,038 



6,314 
7,655 
8,040 
10,091 
6,909 
3,089 
1,194 
720 
1,386 
1,467 
1,972 
2,080 

646 
669 
606 
639 
648 
671 
524 
284 
446 
608 
433 
641 

817 
685 
669 
661 
685 
743 
432 
440 
486 
842 
464 
760 

661 
600 
605 
009 



1.044 

2,218 

1,858 

1,422 

709 

949 

587 

343 

774 

3,242 

4,242 

1,798 

82 
70 
45 

116 
14 

143 
60 
69 

-43 
64 

267 
81 

134 
256 
109 
234 
276 
199 
24 
168 
111 
169 
269 
278 

201 
253 
365 
130 



Ǥ 



A 



g'SS 
5l 



607,966 
673,861 
806,405 
086,027 
601,956 
481,357 
322.366 
»282,706 
331,605 
374, 171 
428,606 
433,042 

64,145 
44,915 
56,404 
61,837 
48,020 
60,662 
60,959 
47,011 
46,954 
52,535 
47,384 
67,070 

64,714 
48,220 
68,518 
65,683 
64,143 
66,820 
63,682 
63,702 
66,760 
69,201 
57,085 
65,441 

62,885 
64.493 
70,634 
67,003 



$1,000 
1.048 
1.034 
1.049 
1.157 
1.370 
1.643 
1.617 
1.335 
1.250 
1.238 
1.169 

.969 
.980 

!997 
.905 
.996 
1.005 
1.009 
1.003 
1,006 
1,010 
1.021 

1.036 
1.044 
1.056 
1.003 
1.002 
1.063 
1.060 
1.050 
1.038 
1.035 
1.038 
1.037 

1.037 
L044 
1.047 
1.035 



> Adjusted (or seasonal Tartation. 

* March axoluded; complete data not ayaOable on aoeount of bank hoUdayi. 



NATtONAIi ECONOMY ANB THB BAKKINO STSTBM (^ 

iS«{ee<<(I «er«0a on hutineu ocfMif— -Continued 



Ye«r and montb 



1028 

May 

Jiwe 

July ... 

August 

September.... 

October. 

November-.. 
December 

1029 

January 

February 

March 

April 

May -.. 

June 

July 

August *. 

September.,-. 

October 

November... - 
December.... 

1930 

January 

February 

March 

April 

May 

June 

July 

August 

September 

October 

November.... 
December 

1931 

January 

February 

March 

April 

May 

June 

July 

August 

September.... 

October 

November 

December — 

1932 

January 

February 

March 

April 

May 

June 

July 

August 

September.... 

October 

November 

December 

1033 

January 

February 

March 

April 

May 

June 

July 

August 

September.... 

October 

Novembw.... 
Deoember 



108 
108 
109 
110 
113 
116 
117 
118 

119 

lis 

118 
121 
122 
125 
124 
121 
121 
ii8 
110 
103 

106 

107 

103 

104 

102 

98 

93 

90 

90 

88 

86 

84 

83 
86 
87 
88 
87 
83 
82 
78 
76 
73 
73 
74 

72 
69 
67 
63 
60 
69 
68 
60 
66 
67 
66 
66 

66 
63 
60 
66 
78 
91 
100 
91 
84 
76 
72 
75 



98.2 
98.7 
99.3 
100.4 
100.9 
101.7 
102.7 
103.8 

104.2 
106.0 
106.3 
106.4 
106.6 
107.0 
108.1 
108.4 
107.8 
106.6 
104.4 
101.9 

100.6 
99.0 
97.7 
97.0 
96.7 
93.9 
91.2 
89.0 
87.7 
86.7 
86.3 
83.8 

82.4 
81.4 
81.1 
8i.O 
80.7 
79.2 
78.7 
77.6 
76.0 
73.9 
72.6 
72.4 

71.8 
71.4 
69.9 
67.6 
66.3 
63.6 
61.9 
62.4 
64.4 
65.8 
66.2 
65.6 

64.9 
66.0 
62.2 
63.8 
67.1 
72.2 
77.4 
81.0 
82.8 
S2.9 
81,2 
80.1 



97. b 
96.7 
97.4 
97.6 
9S.6 
96.7 
96.8 
96. 8 

95.9 
98.-4 
96.1 
95.6 
94.7 
96.2 
96.6 
96.3 
96.1 
96.1 
93.6 
93.3 

92.6 
91.4 
90.2 
90.0 
88.8 
86.8 
84.4 
84.3 
84.4 
83.0 
81.3 
79.6 

78.2 
76.8 
76.0 
74.8 
73.2 
72.1 
72.0 
72.1 
71.2 
70.3 
70,2 
68.6 

67.3 
66.3 
66.0 
65.6 
64.4 
63.9 
64.5 
65.2 
66.3 
64.4 
63.9 
62.6 

61.0 
69.8 
60.2 
60.4 
62.7 
65.0 
68.9 
69.6 
70.8 
71.2 
71.1 
70.8 



Security prlo(^ 



108.2 
107.4 
105.7 
103.6 
103.8 
103.7 
104.8 
103.9 

103.0 
101,8 
100,2 
101.6 
101.5 
100.9 
101.6 
100,8 
101.0 
102.0 
106.0 
104.8 

104. 
104.2 
106.7 
104.8 
106.6 
106.2 
106.2 
106.0 
106.2 
106.6 
106.8 
106.4 

106.6 
106,6 
106.6 
106.1 
106.2 
106.6 
106.4 
106.2 
104.0 
98.8 
99.0 
96.3 

91. 3 

98.6 

96.9 

98.8 

97.7 

97.6 

99.7 

101.8 

101.6 

101.5 

101.4 

102,3 

103.6 
102.6 
101.1 
101. S 
102.7 
108.7 
108.9 
108.7 
108.8 
108.6 
100.6 
99.0 



101.6 

100.3 

99.8 

90.4 

99.9 

100.0 

100.4 

99.7 

99,7 
99.2 
98.6 
98,7 
98.3 
97.6 
97.5 
97,1 
96.6 
97.8 
97.4 
98.6 

98.7 

96.7 

09.7 

99.7 

iOO.O 

99.9 

100.2 

100.8 

101.6 

99.8 

08.1 

04.8 

07.8 
97,8 
07,2 
06.2 
04.8 
94.2 
96.4 
02.0 
88.4 
82.0 
82.4 
73.1 

78.1 
74.9 
75.0 
67.0 
62,2 
60.6 
62.1 
72.4 
74.6 
70.8 
60.2 
67.7 

70.7 
68.5 
66.0 
64.8 
72.4 
77.7 
81.5 
80.7 
77.5 
78.8 
73.1 

Tie 



162.1 
146.3 
144.3 
14&3 
166.6 
160.1 
171. 1 
171.4 

185.2 
186. 6 
180. 1 
186.6 
187,8 
190.7 
307,3 
218.1 
225.2 
201.7 
161.1 
153.8 

166.3 
165.5 
172.4 
181.0 
170.6 
162.8 
149.3 
147.6 
148,8 
127.6 
116.7 
109.4 

111.8 
119.8 
121,6 
111.6 
98.3 
96.1 
99.1 
96.3 
86.4 
69.2 
71.7 
68,4 

67.6 
56.5 
57,8 
45.7 
30.8 
34.8 
36.2 
62.1 
66.4 
61.4 
47.9 
47.1 

49.1 
44.9 
43.8 
46.5 
61,6 
72.8 
79.8 
74,4 
78.5 
00.5 
68.8 
70.4 



Caidtal 
(mflUoniof 



1»020 
1,023 
439 
271 
643 
760 

000 

1,221 

1,062 

1,043 

1,016 

810 

l,fi29 

748 

964 

888 

1,622 

870 

298 

676 

849 
602 
841 
934 
1,184 
772 
686 
260 
494 
436 
260 
396 

613 
226 
702 
616 
473 
404 
270 
127 
288 
46 
133 
144 

199 
95 
191 
148 
125 
154 
166 
174 
142 
187 
77 
160 



I 



846 
795 
309 
261 
488 
702 
042 
1,162 

013 
016 
066 
676 

1,187 
731 
894 
863 

1,314 
836 
280 
670 

781 
666 

760 
882 
1,080 
711 
663 
183 
380 
364 
348 



431 

206 
660 
413 
340 
260 
226 
120 
245 
45 
112 
123 

185 
74 

162 
71 
01 
84 

105 
63 
83 

100 
45 

125 



no 


65 


67 


20 


20 


17 


46 


36 


67 


44 


224 


U« 


167 


122 


86 


40 


05 


04 


50 


86 


80 


87 


76 


57 



174 
338 
40 
30 
55 
67 
87 
50 

140 

128 

60 

185 

803 

17 

60 

35 

808 

84 

18 

07 



86 
73 
62 
05 
61 
82 
86 
114 
71 
12 
12 

'S 

142 
203 
124 
144 

46 
7 

48 
1 

21 

21 

14 
21 
29 

73 
34 
70 
50 
111 
50 
28 
83 
85 

45 

87 
8 
10 
31 
108 
45 
10 
SI 

\ 

to 




71,010 
73,485 
68,061 

68,170 
73,804 
71,349 
83,386 

83,814 
70,777 
88,534 
74^780 
70.635 
00,660 
77,081 
77,844 
77,017 
05,537 
83,000 
00^763 

60,438 
53,636 
66,738 
62,040 
61.81i 
63,8i3 
53,744 
46,098 
48,636 
54,460 
43,176 
63,107 

46,353 
38,031 
47,011 
46,440 
43,030 
45.309 
30,461 
84,037 
86,700 
38,803 
39,009 
30,846 

38,600 
37,261 
39,889 
39,021 
25.411 
27,108 
38,380 
35,215 
26.081 
35,306 
30,750 
36^787 

34.400 
22,4t7 



33,028 

81, sn 

86,451 
H666 

30,807 
34,181 
30^801 



$1.QM 
tOM 
1.037 
1.038 
ItOU 
1.084 
1.044 
1.0M 



%^ NAilpNAt BX30N0MY AND TttB I^^ 

SdeeUd teriei Mi hurinetB <ieft*9<<^— ContitkU^ 



Y«ttftnd month 



Febraary. 
Marcb 



1094 



July 

Atiirtut.... 
September. 
October... 
November. 
December., 



1930 
|ftnaary....«. 

FebruHry 

March 

fifij";;::::::: 

June 

Jttly 

August 

Beptomber.... 

October 

November.... 
Pecember 



1930 

January 

February 

March 

^■r;::::::: 

June 

July 

August 

September.... 

October 

November 

December 



1987 

January 

February 

March 

April 

May 

June 

July 

Augmt 

September.... 

October...... 

November.,., 
December 



January... 
February.. 

March 

Awil 

May 

June 

July 

August..... 
September. 









90 
90 
88 

80 
85 
87 
80 
88 
91 
95 
90 
101 



97 
9i 
93 
101 
101 
104 
108 
108 
109 
110 
114 
121 



114 
110 
118 
118 
118 
114 
114 
117 
111 
102 
88 
84 



80 
79 
79 
77 
70 
77 
83 



to. 7 
83.9 
80.9 
88.3 
89.0 
88.3 
87.3 
80.4 
81.3 
84.4 
84.0 
80.4 



88.8 
90.0 
90.7 
90.8 
90.1 
89.2 
90.1 
91.1 
91.8 
93.0 
94.1 
94.fi 



94.3 

92.8 

93.0 

94.3 

96,7 

90.7 

98.4 

99.3 

99.9 

100.8 

102.8 

104.9 



I0S.2 
100.0 
107.3 
108.4 
109.1 
108.4 
109.3 
106.0 
107,2 
105.1 
100.0 
95.1 



90.0 
88.9 
87.4 
80.4 
83.7 
82.4 
82.9 
80.1 



72.2 
73,0 
73.7 
73.3 
73.7 
74.0 
74.8 
70.4 
77.0 
70.6 
70.6 
70.9 



78.8 
79.6 
79.4 
80.1 
80.2 
79.8 
79.4 
80.6 
80.7 
80.6 
80.0 
80.9 



80.0 
80.0 
79.8 
79.7 
78.0 
79.2 
80.6 
81.0 
81.0 
81.6 
82.4 
84.2 



86.9 
80.3 
87.8 
88.0 
87.4 
87.2 
87.9 
87.6 
87.4 
80.4 
83.3 
81.7 



80.9 
79.8 
79.7 
78.7 
78.1 
78.3 
78.8 
78.1 
78.3 



Saeurlty ivtoea 



100.2 
102.1 
103.1 
103.7 
104.7 
104.9 
105.0 
104.3 
102.3 
103.4 
108.7 
104.1 



106.4 
100.4 
100.2 
100.8 
100.8 
107.0 
107.3 
100.6 
104.7 
104.9 
106.3 
106.2 



106.8 
100.3 
100.8 
107.0 
107.1 
100.9 
100.0 
107.2 
107.2 
100.9 
108.2 
107.9 



107.3 
107.2 
106.2 
102.0 
103.3 
103.6 
104.0 
104.0 
103.3 
10$. 6 
104.0 
104.7 



106.3 
100.4 
106.0 
104.8 
100.1 
100.0 
106.7 
106.9 
104.8 



78.0 
84.0 
84.8 
87.0 
80.1 
80.3 
80.1 
83.9 
83.0 
84.1 
84.3 
85.8 



87.0 
87.4 
84.6 
85.6 
87.0 
88.3 
89.2 
89.9 
90.4 
89.8 
91.1 
02.4 



06.3 
97.2 
90.0 
96.9 
06.6 
90.2 
97.1 
97.7 
98.6 
99.6 
90.8 
99.9 



100.3 
100.0 
98.6 
90.0 
90.2 
95.0 
96.3 
94.8 
91.3 
80.4 
83.3 
82.7 



80,0 
79.3 
70.0 
73.8 
70.6 
76.3 
80.8 
81.3 
78.7 



74.0 
80.9 
77.2 
79.0 
71.8 
73.1 
71.4 
67.6 
07.4 
07.6 
08.3 
09.0 



70.1 
08.0 
04.0 
07.6 
73.1 
76.6 
78.8 
83.0 
85.0 
85.2 
93.3 
95.3 



100. 1 
106.1 
108.7 
109.0 
101.0 
106.6 
109.2 
113.0 
114.1 
118.7 
124.2 
122.8 



120.0 
129.6 
129.9 
124.5 
110.3 
113.6 
117.8 
120.5 
100.4 
91.4 
82.9 
82.2 



81.0 
80.7 
77.9 
70.7 
73.9 
73.1 
88.0 
80.6 
80.0 



Oapttai lasuea 
(millions of dollars) 



91 
89 
149 
242 
144 
308 
370 
209 
71 
157 
137 
187 



141 

90 
290 
608 
474 
612 
040 
425 
438 
368 
384 
422 



402 
303 
763 
986 
420 
734 
340 
297 
409 
404 
372 
725 



0O3 
627 
884 
303 
205 
600 
341 
188 
221 
204 
137 
105 



122 
199 
245 
302 
217 
511 
400 
415 



48 

81 

99 

141 

100 

119 

214 

180 

30 

122 

104 

139 



92 

60 

106 

90 

83 

55 

127 

194 

173 

148 

118 

221 



123 
107 
128 
176 
112 
218 
104 
217 
178 
180 
168 
206 



244 

190 

187 

169 

149 

SOO 

248 

79 

154 

90 

96 

123 



93 

82 
120 
197 
157 
347 
390 
180 



43 

-8 

60 

101 

44 

189 

162 

29 

32 

36 

S3 

48 



49 
46 
186 
418 
391 
467 
013 
231 
266 
220 
266 
201 



279 
196 
636 
810 
308 
616 
236 
80 
231 
278 
214 
469 



309 
337 
197 
144 
110 
200 

93 
109 

07 
108 

42 

42 



29 
117 
119 
160 

00 
104 

76 
230 



27,221 
20,010 
29,680 
31,281 
28,707 
30,142 
27,702 
20,706 
23,894 
26,627 
24,662 
30,811 



29,980 
25,609 
31,649 
31,660 
30,108 
31,475 
33,287 
30,268 
29,031 
32, 677 
32,227 
36,360 



35,424 
31,672 
37,490 
34,783 
33,225 
37,603 
34,816 
31,409 
33,242 
37,313 
36,869 
46,896 



39,487 
34,630 
42,014 
37, 144 
34,410 
30,404 
30,914 
31,890 
33. 370 
30,085 
31,003 
Z% 114 



32,084 
26,048 
32,119 
31, 169 
28,841 
32,797 
30,605 
28,270 
29,020 



$1,380 
1,309 
1.307 
1,304 
1,307 
1,340 
1,337 
1,309 
1.289 
1,307 
1,307 
1,300 



1,209 
1,268 
1,209 
1,248 
1,247 
1,203 
1,209 
1,242 
1,239 
1,242 
1,241 
1,230 



1,241 
1,241 
1,266 
1,200 
1,272 
1,263 
1,242 
1,220 
1,226 
1,227 
1,214 
1,188 



1.104 
1.109 
1.139 
1.130 
1.144 
1.147 
1.138 
1.143 
1.144 
1.171 
1.200 
1.224 



1.230 
1.203 
1.206 
1.271 
1.280 
1.277 
1.209 
1.280 
1.277 



Sotlroee: Industrial production, Board of Oovernors of the Federal Reserve System; factory employmenti 
Board of Oovemors of the Federal Reserve System; wholesale commodity prices, Bureau of Labor Statls< 
Uos. Security prices; U. B. Qovemment bonds. Board of Oovernors of the Federal Reserve System; cor- 
porate bonds, Standard Statistioi Co.; common stocks, Standard Statistics Oo.; capital issues, Commercia} 
and Financial Chronicle and U. 8. Department of Commerce; hank debits, Board of Oovernors of the Fed* 
•ral Reserve System; purchasing power of the dollar, Btuvau of I«bor Ststistics. 



SOME IMPBOVBIf ENTA frkAT fiATXS BiBBN AOCOMFLtSHBD AND 90101 'WSf 
ABB NEEDED IN OtTB MONBtART STBTBM 

It will iutereat Btucients to know that the SeventT^third and 
Seventy%ttrth Congresies since March 1933 have tak^i variottt 
steps to improve the monetary structure, the more important of 
which are as follows: 

Made all money legal tender. . 

Abolished the national-bank note. 

Removed gold from domestic circulation. 

Stopped the minting of gold and put it in bars in the vaults to bo 
used exclusively as a commodity, or in the payment of international 
balances upon permit of the Secretary of the Treasury. 

Outlawed all future dollar contracts payable in gold by weight. 

Made all existing dollar contracts payable by gold in weight subject 
to payment by lawful money or legal tender. 

Established a guaranty of bank deposits up to $5,000, etc. 

Authorized the expansion of the currency through $1 silver certifi- 
cates, and actually increased such currency by about a billion dollars. 

Authorized gold to be sold for commodity uses and for payment of 
foreign balances, and gold has been made salable at the price of $35 
an ouuce for such uses by the Secretary of the Treasury. 

Authorized the purchase of silver tmtil the silver held by the 
United States shaU equal one-fourth of the gold so held. 

Passed laws to regulate the security market and provided safe- 
guards to prevent run-away speculation in securities by inflated 
credit. 

Removed the auxiliisiry corporations through which banks specu* 
lated in securities. 

Authorized the expansion of credit through the sale of Government 
bonds to the banks in providing public works and public reUef to 
people in distress. 

Passed a new Banking Act of 1936, establishing the Federal Reserve 
Board of Governors, of seven members, giving them control over the 
expansion and contraction of credit and currency. 

Given the Federal Reserve Board power to veto the election of the 
president of any Federal Reserve bank. 

Given the Federal Reserve Board absolute control of the interest 
and discount rate of the Federal Reserve banks. 

Given the Board the right to raise the reserves of member banks 
100 percent. 

Given the Board the power, through an open-market committee, 
to require the Federal Reserve ban)^ to buy and sell bonds as a 
means of expanding and contracting credit. 

Expanded the power of member banks to lend money on real estate.; 

Expanded the power of the Reserve banks to discount bankable 
assets of member banks. _ 

Used the public credit on a colossal scale to relieve the most acute 
effects of the existing depression. 

Greatly improved the value of Government bonds and lowered the 
rates of mterest on the public debt. 

Its ]>olicies have resulted, by the sale of bonds to the banks, in 
increasing the demand bank deposits, the money supply of the 
country, until in volume they are steadily approaching normal; 



gg WkXlOVIAL BOONQMT A1«D THB BAMKIMO SX8TBM 

$llfiOQiQOOfiOO of d^jaAod deponto,, neverUielefls, are inak^ve a^ 
money Doing held as corporate reservea. 

^ The question of monetary reform has been activdy under discus- 
idon in the Seventh-fifth Congress without any final action being 
takiniy but it is confidently expected ^by advocates of monetary reform 
that the Seventy ndxth Congress will act in perfecting the national 
monetary system. 

The pending bills propose the Government taking over the stock 
of the Federal Reserve banks, the declaration of a congressional 
monetary poUcy; the expansion of the powers of the Boajrd of Gov- 
ernors of the Federal Reserve System^ eliminating the open market 
committee and the Federal Reserve Advisory Council,, establishing a 
dollar of uniform, permanent, debt-paying, purchasing power oy 
regulating the volume of money. There wffl be considered probably 
the more equitable distribution of money by States, the establishment 
of one form of currencv, the coordmation of agencies affectm^ mone- 
tary control, sutjh as tne Federal Deposit Insurance Corporation, the 
Comptroller of the Currency, the Secretary of the Treasury; and 
making all banks members of the Federal Reserve System. 
: Over a thousand pages of testimony was taken by the Banking and 
Chirrency Committee of the House during 1938. (Advanced students 
will find the congressional hearings of mterest.) 
' The Committee on Banking and Currency of the United States 
Senate proposed a careful examination of the public control and regula- 
tion of the value of money before the meeting of the Seventy-sixth 
Congress, 

The subject matter will also be considered by the Temporary 
National Elconomic Committee, as directed by Senate Joint Resolu- 
tion No. 300.- ^ 

Modified bills by Congressmen T. Alan Goldsborough, Wright 
Patman, and Charles G. Binderup are expected to be under con- 
sideration in January 1939. 

A FEW QUOTATIONS OP NOTABLE LEADERS 

Benjamin Franklin, on being asked in Great Britain how he 
accoimted for the prosperous condition of the Colonies, said: 

That ifl simple. It is only because in the Colonies we issue our own money. 
It is called colonial scrip, and we issue it in the proper proportion to the demand of 
trade and industry. 

It was not very long until this information was brought to the 
Rothschilds' bank, and they saw that here was a nation that was ready 
to be exploited ; here was a nation that had been setting up an exam- 
ple that they could issue their own monejr in place of the money com- 
mg through the banks. So the Rothschild Bank caused a bill to be 
introduced in the English Parliament which provided that no colonv 
of England could issue their own money. They had to use English 
money. Consequently the Colonies were compelled to discard their 
scrip and mortgage themselves to the Bank of England in order to get 
money. For tne first time in the history of the United States our 
money began to be based on debt. 

Benjamm Franklin stated that in 1 year from that date the streets 
of the Colonies were filled with the imemployed, because when Eng- 
land exchanged with them, she gave the Colonies only half as many 



NATIONAL BCONOMY AND WE BANI^ING STSTBM :!^ 

units of payment in borrowed money from Uie Rothschild Baoliiii 
they had in scrip. In other words^ their circulating medium was 
reduced 50 percent^ and everyone became unemployed. The podr^ 
houses became filled^ according to Benjamin Franklin's own statement. 
Mr. Franklin went further than that. He said that ikas was the 
original cause of the Hevolutionary War. In his own language: 

The Colonies would gladly have borne the little tax on tea and other matters 
had it not been that England took away from the Colonies their money, whioh 
created unemployment and dissatisfaction. 

(As narrated by Hon. C. G. Binderup in a speech on the floor of the 
House of Representatives, 76th Cong.) 

Permit me to issue and control the money of a nation, and I care not who makes 
its laws * ♦ * (Mayer Anselm Rothschild, 1700). 

John Adams wrote to Thomas Jefferson in 1787: 

All the perplexities, confusion, and distress in America arise, not from defects 
in the Constitution or confederation, not from want of honor or virtue, so much 
as from downright ignorance of the nature of coin, credit, and circulation. 

Thomas Jefferson said: 

I believe that banking institutions are more dangerous to our liberties than 
standing armies. Already they have raised up a monied aristocracy that has set 
the Government at defiance. The issuing power should be taken from the banks 
and restored to the people to whom it properly belongs. 

Ricardo says: 

That commodities rise or fall in proportion to the increase or diminution of 
money I assume as a fact that is incontrovertible. 

Andrew Jackson said: 

If Congress has the right under the Constitution to issue paper money, it was 
given them to be used by themselves, not to be delegated to individuals or to 
corporations. 

Adam Smith, called the father of political economy, said: 

Money measures things and things measure money, Each measures the other 
by and according to its own abundance, by comparison. If you double the volume 
of money in circulation, you double the price of everything. By doubling the price 
you divide the debt because it takes only half as much labor or the products of 
labor to pay the same debt. If you divide the amount of money in circulation, 
you divide the price of everything. By dividing the price of everything, you 
double your debts, for it will take twice as much labor or the products of labor to 
pay the same debt. 

John Stuart Mill tells us: 

That an increase of the quantity of money raises prices and a diminution lowers 
them, is the most elementary proposition in the theory of currency, and without 
it we should have no key to any of the others. 

The few who can understimd the system (check money and credits) will either 
be so interested in its profits, or so dependent on its favors, that there will be no 
opposition from that class, while on the other hand, the great body of the people 
mentally incapable of comprehending the tremendous advantage that capital 
derives from the system, will bear its burdens without complaint, and perhaps 
without even suspecting that the system is inimical to their interests. (From a 
letter written by the Rothschild Bros, of London, England, to a New York firm 
of bankers, June 26, 1863.) 

From a letter written by the Rothschild Bros, of London, England, 
to a New York firm of bankers, June 25, 1863: 

The few who can understand the system (check money and credits) will either 
be so interested in its profits, or so dependent on its favors, that there will b^ 
no opposition from that class, while on the other hand, the great body of th* 



100 Niiii^ONAt BOONOMt AN0 THE) BANKINa SYSTEM 

peo^ meiit^Uy inoftpal^ of cmnprehehdihg the ti^tnendoiis advantage that 
^i^tal derives from the iystem, will bear its burdens without complaint, and 
perhiHps without even suspecting that the system is inimical to their mterests. 

Salmon P. Chase, Secretary of the Treasury, 1861-64, Chief 
Justice, United States Supreme Court, 1864-73, said: 

My agency in promoting the passage of the National Bank Act was the greatest 
financial mistake of my life. It has built up a monopoly which afifects every 
interest in the countrv. It should be repealed; but before that can be accom- 
plished, the people will be arrayed on one side and the banks on the other, in a 
contest such as we have never seen before in this country. 

In 1872 Horace Greeley wrote his opinion of the National Banking 
Act, in part as follows: 

While boasting of our noble deeds, we are careful to conceal the ugly fact that 
by our iniquitous money system we h>»,ve nationalized a system of oppression, 
which, though more refined, is not leas cruel than the old system of chattel 
slavery. 

James G. Blaine, former candidate for the Presidency who, on fcluv 
floor of the Hou^e on February 10, 1876, said: 

♦ ♦ * the money question should be approached in no spirit of partisan- 
bitterness * ♦ ♦, Firmly attached to one political party myself, firmly 
believing that parties in free government are as healthful as they are inevitable, 
I still think there are questions about which parties should agree never to dis- 
agree, and of these are the essential nature and value of the circulating medium. 

James A. Garfield stated: 

Whoever controls the volume of money in any country is absolute master of 
all industry and commerce. 

Benjamin Harrison said: 

If there is one measure better calculated than another to produce that state 
of things when the rich are getting richer and the poor are daily getting poorer, 
it is a metallic currency. 

Woodrow Wilson, 1916, said: 

A great industrial nation is controlled by its system of credit. Our system of 
credit is concentrated. The growth of the Nation, therefore, and all our activities 
are in the hands of a few men ♦ ♦ *, We have come to be one of the worst 
ruled, one of the most completely controlled and dominated Governments in the 
civilised world — no longer a Government by free opinion, no longer a Government 
by conviction and the vote of the majority, but a Government by the opinion and 
duress of small groups of dominant men. 

President Wilson, in advocating the Federal Reserve Act, said: 

We must have a currency, not rigid as now, but really elastic, responsive to 
sound credit, the expanding and controlling credit of everyday transactions, the 
normal ebb and flow of personal and corporate dealings. Our banking laws must 
mobilize reserves; must not permit the contraction anywhere in a few hands of the 
monetary resources of the country or their use for speculative purposes in such 
volume as to hinder or impede or stand in the way of other legitimate more fruitful 
uses. And the control of the system of banking and of issues which our new law 
is to set up must be public, not private, must be vested in the government itself 
so that banks may be instruments, not masters, of business and of the individual 
enterprise and initiative. 

The late Hon. Charles A. .Lindbergh, Sr., in his book "The Eco- 
nomic Finch", page 96, writing of the panic of 1920, said: ~ 

Under the Federal ReserVe Act panics are scientifically created; the present 
panic is the first scientifically created one, worked out as we figure a mathematical 
problem. 

Thomas Edison said: 

The only dynamite that works in this country is the dynamite of a sound idea. 
I think we are getting a sound idea on the money question. The people have an 



NATIONAL ECONOMY AND THE BANKINO SYSTEM 

iiifltinct which tells them that something is wrong and that the wrong MmelSdw 
centers in money. 
Don't allow them to confuse you with the cry of *'paper money." The danger ,<tf 

?aper money is precisely the danger of gold — if you get too much it is no good. 
'here is just one rule for money and that is to. have enough to carry, all the le^ti* 
mate trade that is waiting to move. Top little and too much are both bad. Btit 
enough to move trade, enough to prevent stagnation on the one hand, not enough 
to permit speculation on the other hand, is the proper ratio. 

If our Nation can issue a dollar bond it can issue a dollar bUl. The element 
that makes the bond good makes the bill good also. The difference between the 
bond and the bill is that the bond lets money brokers collect twice the amount of 
the bond and an additional 20 percent interest, whereas the currency pays nobody 
but those who contribute directly in some useful way. 

' It is absurd to say that our country can issue $30,000,000 in bonds and not 
$30,000,000 in currency, Both are promises to pay; but one promise fattens the 
usurer and the other helps the people. 

It is the people who constitute the basis of government credit. Why then can- 
not the pcoi))e have the benefit of their own gilt-edge credit bv receiving noh* 
intorost-bearing currency — instead of bankers receiving the benefit of the people's 
credit in interest-bearing bonds? If the United States Government will adopt 
this policy of increasing its national wealth without contributing to the interest^ 
collector — for the whole national debt is made up of interest charges — then you 
will see an era of progress and prosperity in this country such as could never have 
come otherwise. 

Henry Ford said: 

The function of money Is not to make money but to move goods. Money is 
onlv one part of our transportation system. It moves goods from man to man. 
A (foliar bill is like a postage stamp; it is no good unless it will move cominodities 
between persons. If a postage stamp will not carry a letter, or money will not 
move goods, it is just the same as an engine that will not run. Someone will have 
to get out and fix it. 

In May 1928, 100 prominent British leaders connected with the 
productive industries sent to Prime Minister Baldwin the following 
statement: 

We believe that a more stable system of currency credit and a means of sta-. 
bilizing the price level are prerequisite to the restoration of prosperity of the great 
basis industries of this country. It would do far more than the expedients which 
the Government has been compelled to adopt. (New York Times, May 27, 
p. 20, column 3.) 

Mr. F. W. Pe thick-Lawrence, in 1929-31 financial secretary to the 
British Treasury, stated: 

I am convinced * * * that unemployment as it exists today is not an 
economic but a monetary phenomenon: a stabilized price level with neither 
inflation nor deflation is the only workable solution. 

Frank A. Vanderlip, former Assistant Secretary of the Treasury, 
in February 1936, said: 

We have already tried borrowing and spending our way to recovery. We have 
made numberless hopeful and well-meant experiments, aimed to bring us but of 
the depression. Thus far we have not emerged, nor will we — until the fatal de- 
fects of our money system have been corrected. To those defects, more than to 
any other cause, I attribute the depression. 

What is it we want of our currency? We want money in which we will have 
unshaken confidence; confidence that it will be stable in its value. We want a 
dollar that will, in the language of the President) ''not change its purchasing and 
debt-paying power during the succeeding generation." 

And again: 

Congress should fix a permanent standard of value, not a permanent gold 
weight, for the dollar; so that the dollar shall always buy the same gross section 
of commodities measured by the price index. 

Then Congress should create an executive authority to carry out its intention. 
It should provide a mechanism for the management of our currency. 



102 NATIONAL mOOVOWt ANP THB BANKINO 3YSTBH 

Cte Ckstobei* 22, 1933, President Roosevelt said to the people of the 
tFmt^ States: 

Wliffiiyire have restored the price level, we shall seek to establish and maintain 
a dbilair which will not change its purchasing and debt-paying power during the 
«uoee6dihg seneration* I have said that in mv message to the American dele- 
gation last Jtily, and I say it now once more. (The Public Papers and Addresses 
of Franklin D. Roosevelt, vol. 2, p. 426.) 

Maniner Eccles, chairman of the Board of the Federal Reserve 
System, said in Collier's on June 8, 1936: 

The banks can create and destroy money. Bank credit is money. It is the 
money we do most of our business with, not with- that currency which we usually 
-think of as money. 

Maj. L. L. B. Angas, "Slump Aliead in Bonds": 

The modem banking system manufactures "money" out of nothing; and the 

f>roce88 is perhaps the most astounding piece of "sleight of hand" that was ever 
nvented. Banks in fact are able to create (and cancel) modern "deposit money." 
They can in fact inflate and deflate, mint and unmint, the modem "ledger-entry" 
currency. 

Robert H. Hemphill, former credit manager of the Federal Reserve 
Bank of Atlanta: 

If all bank loans were paid, no one would have a bank deposit, and there would 
tiot be a dollar of currency or coin in circulation. This is a staggering thought. 
We are completely dependent on the commercial banks. Someone has to borrow 
^very dollar we have in circulation, cash or credit. If the banks create ample 
synthetic money, we are prosperous; if not, we starve. We are absolutely without 
a permanent monetary system. When one gets a complete grasp upon the 
picture, the tragic absurdity of our hopeless position is almost incredible — but 
there it is. It (the banking problem) is the most important subject intelligent 
persons can investigate and reflect upon. It is so important that our present 
<3ivilization may collapse unless it is widely understood and the defects remedied 
very soon. 

Ralph M. Haw trey, assistant secretary of the British Treasury: 

Banks lend by creating credit. They create the means of payment out of 
nothing. 

Irving Fisher, Professor Emeritus of Economics at Yale, says — 

When a bank lends or invests, it extends o;redit, i. e., creates check-book money. 
When it gets loans paid or sells investments, it contracts credit, i. e., destroys 
•check-book money. In normal times such creation and destruction of money 
roushry balance; But when they do not balance the Nation's money is inflated 
or dfeflated and causes a boom or a depression. ' 

Sumner H. Slichter, Professor of Business Economics at Harvard, 
says in his Modem Economic Society: 

When banks grant credit by creating or adding to deposits subject to check * ♦ ♦ 
new dollars are created. It is true that the new dollars are not stamped out of 
gold; they are credit dollars and they are created by the stroke of the pen rather 
than by dies and the stamping macnlnes, but their purchasing power is not less 
than that of the dollars coined at the Government mint. In other words, the 
principal way in which dollars are created in modern economic society is by 
borrowing, This means that the number of dollars in existence in any particular 
time depends upon the willingness and ability of banks to lend. The volume of 
purchasing power fluctuates with men's state of mind; the growth of pessimism 
may sudaenly throw millions of men out of work, or the growth of confidence 
may create thousands of jobs overnight. 

Viscoimt D'Abemon, formerly a prominent banker and after the 
war the British Ambassador to Germany, states: 

It is too much the custom to act as though prices were bom and not made — 
A8 though they were sent down by Providence independently of human action, 



NATIONAL BCONOmr AKD THB BAJNKIKO ST8Ti»l K|§ 

and m if ib^y had to be ae«^Hed like Urn gentle rain from baaven. Sueh a vi»ir 
is, in my iuagment, a profouiid miftake. The price level is detemUned in tto 
main by hu;\4Ui action and by wise or unwise dedsioos. A stable priee le¥^ l» 
an achievement of intelligenee and not an accident of nature. 

Lord Yemoti, a prominent leader of the coal industry, atat«s; 

1. Movements to change wages and hours of labor up or down are the main 
cause of i^idustrial strife. 

2. These movements are largely due to changes in the value of money, which 
is expressed by the average level of prices. 

3. Changes in the value of money further aggravate the trouble by opening 
out a gap between wholesale prices and the cost of living. 

4. For these reasons it is urgently nocessary that the value of money should 
be stabilized in the interests of industrial peace. 

Sir Reginald McKenna, chairman of the board, London City Mid- 
land, largest in the world, said: 

History has shown that, apart perhaps from wars and religious intolerance, no 
single factor has been more productive of misery and misfortune than the high 
degree of variability in the general price level. This may sound like an extrava" 
gant statement, but so far from being of the nature of' a demogogic outburst it Is 
clearly demonstrable from the course of events in various countries ever since 
money became an important element in the life of civilized communities. A 
stable price level is a thing to be desired, second only to international and do* 
mestio peace. 

And again in the Midland Bank Monthly after the sterling pound 
had been taken off gold, he says in part: 

In the past 4 years the progress of ideas has been rapid. This is evident to 
any reader of speeches on monetary policy delivered 10 years ago and today by 
members of the governments in oifice. The maintenance or restoration of any 
particular gold value for sterling — or, if the expression be preferred, of any par- 
ticular sterling price of gold — is no longer regarded by both Govemmeht and 
central bank as the dominant o&jective of monetary policy. In fact, the gdld 
value of sterling has dwindled by 40 percent — neither the Government nor the 
bank does anything about it, and no one is in the slightest degree disturbed, 
since the pound buys just as much goods and services as in 1931. 

Every bank loan creates a deposit, and the repayment of that loan destroys 
the deposit. Every bank purchase of securities creates a deposit, and the sale 
of securities destroys the deposit. — (Reginald McKenna, chairman of the board, 
London City Midland.) ' 

* * ♦ a State issued paper money of full face value, guaranteed by a fully 
covered redemption fund composed of securities, issued automatically, retirea 
automatically, self-regulating, never redundant, never deficient, neutral in its 
effect on prices but rising equal to any strain upon it: guaranteed against debase- 
ment by the State which isi^ues it, and incapable of debasement by the communitv 
which purchases and uses it. — (Description of an ideal paper n(ioney by Dr. Wil-' 
Ham A. Shaw in his well-known work entitled "The Theory and Principles of 
Central Banking.") 

Never was a people so readilv deceived nor so easily subdued as the British 
public of the present period. All one has to do is to raise the cry "inflation,** and 
straightway all classes turn aside from the only road leading to safety, plenty, 
peace, and happiness. — (Arthur Kltson in The Bankers' Conspiracy,) 

When it is remembered that kings and governments have, throughout the 
ages, insisted with jealous care on their prerogative of issuing money and control- 
ling currency within their jurisdiction, it is somewhat strange to find modern 
states accepting as axiomatic, a limitation of their sovereignty in the sphere of 
money, so lar-reaching in its effects on their own powers and on the daily lives of 
their citizens, as is involved in their agreeing to conform In all circumstances to | 
standard of value over which they nave no control. — (PUinned Money, by Sir 
Basil Blackett.) 

Money is a social instrument and morally belongs to the people. 
Money is merely a title to wealth. 

It is redeemed every time it is accepted by the public for goods and services and 
needs no gold redemption. — (Arthur Kitson.) 



104 NATIONAt ECONOMY AND THE BANKING StS^M 

Tbe youth wbo eim •olye the money que«tion will dp more for the world than 
aU the professional soldiery of history.— (Henry Ford, My PhUosophjr of Life.) 

♦ t * the cheque alone is manufaetured by the bankers without any limit 
or iieiBtriction by law. By this interesting development the manufacture of cur- 
rency, which for centuries has been in the hands of Governments has passed^ in 
regard to a very important part of it, into the hands of companies for the con- 
venience of their customers and the profits of their shareholders. — (Hartley 
Withers, Esq., Business of Finance.) 

Banks create credit. It is a mistake to suppose that bank credit is created to 
any important extent by the payment of money in the banks. — (Encyclopedia 
Btitannica.) 

Now, curious as it may seem at first glance, it is substantially correct to say the 
banks have the power to create money. — (Francis Williams, Esq., (Daily Herald) 
Democracy and France.) 

People often talk of money going abroad or of foreign money coming here, but 
as a fact when gold is not in use money is incapable of migration. The title to 
the money may change ♦ * ♦ but the change of ownership does not remove 
the money, which necessarily remains and can only be expended where it was 
created. No exchanjge transaction, no purchase or sale of securities, no import of 
foreign goods or export of ©ur own can take money out of the country or bring it 
here. Bank loans and their repayment, bank purchases and sales are in substance 
the sole cause of variation in the amount of our money.— (Rt. Hon. Reginald 
MoKenna.) 

The difference between actual production and possible production represents 
the cost to the people of the United States of maintaining present financial 
institutions. 

It should, by now, be quite apparent that any restriction of production results 
in an impoverishment of society — so long as the need for the restricted goods is 
not universally satisfied. -- 

A flow of buying power must be released which will be capable of commanding 
the flow of desired goods and services. The limit should be set only by our 
resources, manpower, equipment, and technology. 

If production were released, the present conflict between labor atid capital 
would seem to be automatically resolved. In order to distribute the goods and 
services listed in the Budget, workers would have to be paid the most possible in 
contradistinction to present practice, which compels employers to pay in most 
cases the least possible. 

At present tne United States habitually exports more than it imports. We 
have become a creditor nation. Such a condition compels either a reduction of 
our exports, a repudiation by foreign countries of their debts, or both. And both 
are occurring. 

Keeping in mind that wealth is made up of real things in the physical world and 
is not A mere bookkeeping transaction, it becomes apparent that the period from 
1923 to 1929, instead of being a time of extravagance, represented in fact an orgy 
of saving. 

Tho«e who regret the older days with their half-solved problems often fail to 
realize that there can be no going back ♦ ♦ *. Either man must adjust 
himself to modem technology or he must prepare for chaos and destruction. — 
(The Chart of Plenty, by Harold Loeb.) 



Extracts From thb Address of the Rt. Hon. Reginald McKenna, Chairman 
OF the Midland Bank, January 26, 1938, as Given in the London 
Economist, January 29, 1938 

My lords, ladies, and gentlemen: The year 1937 opened with a good prospect 
of sustained business improvement. The industrial outlook was so promising, 
indeed, that fears were expressed of a coming boom. There were signs of growing 
speculations on the stock exchange and in raw materials: some commodities, 
particularly metals, had made a disturbing jump. Speculation, however, was 
speedily checked by a reduction in the quantity of money and a decline in prices 
followed. The decline went so far as to cause some anxiety, and, although the 
quantity of money was later restored, the closing months of the year that had 
opened buoyantly were marked by a more subdued outlook. 



NATIONAL EOO^fOMT AND TEOSBANiaNa^S JQg 

DKPBKSSINQ ▲MSRICAN INFLXnCNCBS 

Meanwhile depressing influences Kftd ]t>een at work in the United States. In 
April, President lU^osevelt declared that son^ prices^ partioulariy of the nb^rrpui 
metals, were too high. . At the sanie time the gold MikTe based laip«ly^^^^Q^ 
fied inferences from th^t statement, gave rise to fear^ of a r^ri^tive monetury 
policy and precipitated a Keneral decline in siock-exchtmii^^ 
primary commodity prices. But what might have be^n no more than a temporairy 
break developed in the United States into a real business recession. The CQn> 
fidence of industrialists, already disturbed by the policy of the Government^ 
became seriously shaken, and capital construction was arrested. Happily, no 
similar obstacle to business enterprise is present in Great Britian, and there is no 
indication here that the drop in stock-exchange quotations and commodity 
prices will lead to a comparable decline in general trade. 

It is natural that a setback first in prices and then in trade should be taken to 
confirm the fears of people who are dubious about both the theory and practice of a 
managed currency. Management has meant cheap and abundant money, and in 
their view long-continued cheap money must lead to overexpansion of industry 
and trade, which has its inevitable reaction in a slump. The alleged benefits of 
eheap money, they tell us, have been exaggerated, while the danger of inflation 
is always present. Now they see that a fall in prices and a drop in employment 
have taken place while money is still cheap, and they regard this as definite con- 
demnation of a managed currency. 

* * * 4 * #41 

* ♦ * Much had to be learnt and is being learnt, but, however diflicult it 
may be to put on one side the ideas to which long usage of the gold standard has 
accustomed us, we find in practice that the system is working smoothly. In the 
light of our present knowledge a managed currency can no longer be regarded as 
a mere temporary makeshift while the gold standard is in abeyance. 

41 « f * )(> * * 

* * ♦ It will be remembered that the gold standard, having been suspended 
on the outbreak of war, was brought into operation again in April 1926. It was 
maintained for ovt^r 6 years until September 1931, when once again it was sus- 
pended. For the first time we then^set about controlling our currency without 
any active effort to restore the gold standard. We started a true experiment in 
managementr and the experiment has now lasted for a period almost precisely as 
long as the restored gold standard was in operation, that is for rather over 6 
years from September 1931 to the present time. In answering the (|uestion, then, 
how have we fared, we can compare our economic condition dunng two equal 
Xieriods, one on gold and the other under management. 

« * * m * * * 

* * ♦ When the demands upon the Exchequer are m heavy as they are 
today, both for national defence and social services, I cannot imagine any Chan- 
cellor of the Exchequer closing his eyes to the immense economy in the service df 
the debt that has been made as a result of monetary policy. 

The relative degree of cheapness and abundance of money in the two periods 
is indicated by a comparison of the Bank rate and the quantity of bank deposita. 
From 1926 to 1931 the average Bank rate was approximately 49ie percent. On 
the abandonment of the gold standard the rate was raised to 6 percent as a pre- 
cautionary ^measure which was soon found to be unnecessary. It was lowered by 
stages u'ntil at the end of June 1932 it stood at 2 percent, where it has remained 
ever since. There were no less than 16 changes of Bank rate in the first period of 
6 years, ali of them consequent upon the obligation imposed on the Banl( of Eng- 
land-to protect its meagre gold stock. The subsequent stability at 2 percent has 
lasted over 6^ years. No previous period of stability of so long duration can be 
found in the last hundred years, a fact which suggests that the frequent descrii^ 
tion of present money rates as abnormal is hardly justified. It is difficult to draw 
a line between the normal and the abnormal, but a rate which is now in its sixth 
year and shows no likelihood of variation in the early future might perhaps put 
in a claim to being no more abnormal than any othfjr. The effect of freedom from 
the restrictions imposed by the gold standard is no less apparent in the quantity 
of money than in thiB rate paid for its use. Bank deposits, which were about 
£1,800,000,000 on the average for 1031, rose to near £2,300,000,000 in 1937. 



l(^ NAl*lONAti iBCWNOMY AND THJE BANKlNCJ StSTBM 

TBADS AND lftMPX.OTIfl)NT 

The.ii^creaae in purchwimg j>ower i^pwh tty has been 

iM benefieiftl to indudtry^hd trade as to the Treasury. If we resume our com- 
parison and consider our conditioii at the beginning and end of each of the 6-vear 
periods^ the (Conclusion is inescapable that, whateVer other; forces may have Seen 
In opeifation, a managed currency is at least consistent with flourishing trade. 
Let us look first at weekly wage rates, taking rates in 1924 as the jjasic figure of 
100. In 1926 the corresponding figure was 102; by 1931 it had fallen below 97; 
but by last year it had risen again above 103. Taking the same year as the basis, 
profits, according to Sir Josiah Stamp's calculation, stood at 104 in 1925, dropped 
to 77 in 1931, but rose again to 120 in 1936, the last year for which this index is 
available. The figures of industrial production repeat the same story in another 
form— a decline over the first 6 years and a rise in the second by perhaps 60 
percent. Thus it is evident that, while business was on balance dropping away in 
the earlier period, it was steadily improving In the later. 

Wages and profits are a measure of the incomes of the mass of the population. 
Production measures the degree in which our industrial capacity is being used; 
It governs the total of employment and unemployment, the returns for which 
make perhaps a more striking comparison than any others. Between 1926 and 
1931 the total of our/ insured workers rose by 1,200,000, but the employed fell by 
200,000 and the unemployed rose in consequence by 1,400,000. This was how 
we stood at the end of the first 6-year period. In the second the insured workers 
increased by a further 800.000, but the number of those employed grew by as 
much as 2,100,000, thus reaucing the unemployed by well over a million. What 
a contrast! a decline in employment of 200,0(K) in the first period; an increase 
of 2,100,000 in the second. No figures could be more convincmg; no figures could 
exemplify more clearly the change in our economic condition in the two periods. 
We have still some way to go before we shall be utilizing our full productive 
capacity, but the experience of the past 6 years indicates that in currency and 
credit policy we have not been led astray in using the opportunities for intelligent 
management which the departure from gold presented. I have not suggested, 
and I would not for a moment do so, that the pronounced improvement in our 
position as between the two periods is due solely to the change in the monetary 
system. But I do suggest that there is nothing in our present condition to indi- 
cate that the change has been other than for the better or that it is fraught with 
unknown perils in the future. 



Noted Mbmbbrs of the Stable Money Association 

John E. Aldred, John E. Aldred & Co. 

B. H. Beckhart, Columbia University. 

Luther L. Blake, president. Standard Statistics Co., Inc. 

Francis H. Brownell, vice president, American Smelting & Refining Co. 

Stuart Chase; director, Labor Bureau, Inc. 

Lawrence Chamberlain, trustee, American Institute of Banking. 

John R. Commons, University of Wisconsin. 

Lionel D. Edie, University of Chicago. 

Jeremiah W. Jenks, president, Alexander Hamilton Institute. 

Edwin W. Kemmerer, Princeton University. 

Fred I. Kent, director, Bankers Trust Co., New York. 

E, W. Kopf, Metropolitan Life Insurance Co. 

W. I, King, New York University. 

Harry W. Laidler, director. League for Industrial Democracy. 

Arthur W. Loasby, president. Equitable Trust Co., New York. 

Wesley Clair Mitchell, National Bureau of Economic Research. 

John Moody, president, Moody's Investors Service. 

Warren M. Persons, economist, Goldman Sachs Trading Corporation. 

William Cooper Procter, president, Procter & Gamble Co. 

John E. Robensky, vice chairman, Bank of America, New York. 

Jules S. Bache, J. 8. Bache A Co. 

Luther L. Blake, Standard Statistics Co. 

Percy M. Chandler, Chandler & Co., Inc. 



NATIONAL ECONOMY AND THE BANKING SYSTEM l|)ff 

Pierre S. dulPont, du Pont de Nenidura A Co. 

George Easliibaiui, Eii^tman Kodak Co. 

Michael Friedbxh,' Altxttan Foutidatitin. 

Simon Guggenheim, foniier United States Senator from 

Clarence H7 Kelsey, banker. 

Clarence H. Mackay, the Matokay CoT,^ 

Edward B. MacCrone, E. E. MacCrone & Co. 

Samuel Mather, Pickands, Mather & Co. . 

George Depont Pratt, treasurer, National Council Boy Scouts of Ameri<ia. 

James H. Rand, Jr., Remington-Rand. 

John J. Raskob. 

Alvan )T. Bimonds, Simonds Saw & Steel Co. 

Alfred P. Sloan, Greneral Motors. 

Silas H. Strawn, Winston, Strawn & Shaw. 

James Speyer, Speyer A; Co. 

Simon W. Straus, president, Straus National Bank A Trust Co., New York. 

John G. Winant, former governor, New Hampshire. 

John Hays Hammond, mming engineer. 

David Starr Jordan, educator, author, naturalist. 

Thomas I. Parkingson, president^ American Association for Labor Legislation. 

B. W. Kilgore, chairman, American GJottoh Growers Exchange. 
Charles H. Judd, chairman, American Council on Education. 

H. E. Erdman, president, American Farm Economic Assooiiitidn. 
E. B. Wilson, president, American Statistical Association. 
A. E. Whitney, president. Brotherhood of Railrdad Trainm^Oi 

C. E. Huff, president, Farmers' Educational and Cooperative Union of America. 
Edward J. Vplz, president, International Phbtb-Efagmvei's* Union; 

E. D. Schumacher, president. Mortgage Bankers AMobiatioh of Anderioa. 
Frank D. Rock, president, National Association of Credit Men. 

Milton W. Harrison, president, National Association of Owners of Railroad and 

Public Utility Securities. "~ 

John R. Commons, president. National Consumers' League. 
Uel W. Lamkin, president. National Education Association pf the United States. 
William C. Redfield, president, National Institute ot Social Sciences. 
Walter F. McDowell, president, United States League of Local Building and 

Loan Associations. 
Will F. Morrlsh, president, California Bankers Association. 
W. R. Armstrong, president, Colorado Bankers Association. 
George F. Kane, president, Connecticut Bankers Association. 
Robert V. Fleming, president, District of Columbia Bankers Association. 
Gordon L. Groover j president, Georgia Banketa-Association. 
T. J. Hetland, president, Idaho Bankeirs AsscHiiation. 

F. C. Dorsey, president, Kentucky Bankers Association. 
W. P. O'Nela, president, Louisiana Bankers Association. 
Heyward E. Boyce, president, Maryland Bankers Association. 
W. L. Dunham, president. Michigan Bankers Association. 

A. A. Spe^r,.i>re8ident, Missouri Bankers A^ociation. 

R. O. Kaufman, president, Montana Bankers. Association. 

William J. Couse, president. New Jersey Bankers Association. 

Michael H, Cahill, president, New York State Bankers Association. 

Philip A. Benson, pr^ident, Savihgs Biink Association of the State of New York. 

John F. Daly, prudent, Oregon Bahkerd Association. 

C. J. Kirschner, president.. Pennsylvania Bankers Association. 

F. F. Be&ttie, presideiit, pouth Carolihi Bankers Association. 
W. A. Williams, president, Texas Bankers Association. 

G. H. Boyce, president, Vermont Bankers Association^ 
E. S. Shields, president, Virginia Bankers Association. 

W. T. Triplett, president, Washington Bankers Association. 
O. Jay Fleming, president. West Virginia Bankers Association. 
M. E. Baumberger, president, Wisconsin Bankers Association. 
Willis H. Booth, president, Merchants' Association of New York. 



123338—89- 



log NATIONAL ECONOMY ANP THE BANKING SYSTEM 

COUBT DECISIONS ON MONEY 

The foUowing is a list of decisions relating to the powers of Congress 
over the issuaibice and regulation of the money of the United States (see 
Annotated Constitution of the U. S.): 

QriwooU V. Hepburn, 63 Ky. 20 (1866). 

Uffol Tender Caeea, 12 Wall. 467, 645 (1871). 

United SUUeev, Marigold, 9 How. 860, 668 (1850). 

Brieeoe v. Bank of Kentucky, 11 Pet. 267 (1837). 

HoueUm v. Moore, 5 Wheat. 1, 49 (1820). 

Sturge* v. Crownirtahield, 4 Wheat. 122, 193 (1819). 

Nori» V. UniUd States, 294 U. S. 317, 328 (1935). 

CivU Rights Cases, 109 U. S. 3, 18 (1883). 

Baender v. BameU, 265 U. S. 224 (1921). 

LingSu Fan v. UniUd States, 218 U. S. 302 (1910). 

Norman v. BaUimore <k 0. R. Co., 29^ U. S. 240 (1935). 

Perry v. United States, 294 U. S. 330 (1935). 

McCuUoch V. Maryland, 4 Wheat. 316, 404 (1819). 

JwUiardv. Greenman, 110 Ui S. 421, 438, 449 (1884). 

Veazie Bank v. Fenno, 8 Wall. 633» 648 (1869). 

Merchants Nat. Bank v. United i States, 101, U. S. 1 (1880). 

Osbom V. Bank, 9 Wheat. 738 (1824). 

Bank of United States v. Bank of Georgia, 10 Wheat. 333 (1825). 

Ward V. Smith, 7 WaU. 447 (1869). 

Farmers* & M,Nait, Bank v. Desiring, 91 \5. S. 29, 33 (1875). 

Legal Tender Case, 110 U. S. 446 (1884). 

DooUy V. SmUh,\Z Wall. 604 (1872). 

Nimmh & W. Railroad Co, v. Johnson, 15 Wall. 195 (1873). 

Mwrow V. Henneford, 182 Wash. 626 (1935). 

Ogden v. Saunders, 12 Wheat. 213, 266 (1827). 

TESTIMONY OF EGBERT L. OWEN BEFORE COMMITTEES OF THE HOUSE 

AND SENATE ' 

Goldsborough bill, H. R. 10617, Seventy-second Congress, first 
session.' 

Gold Reserve Act of 1934, S. 2366, Seventy-third Congress, second 
session. 

Banking Act of 1935, H. R. 5367, Seventy-fourth Congress, first 
session. 

Goldsborough bill, H. R. 9216, Seventy-fourth Congress, second 
session. 

Hearings before the Committee on Agriculture and Forestry, 
United States Senate, Seventy-fifth Congress, first session, on farm 
commodity prices. 

Thomad bdl, S. 1990, Seventy-fifth Congress, first session. 

Patman bill, H. R. 7230, Seventy-fifth Congress, third session. 

< Mr. OWM is ajjo tb« Author of Sound, Safe, Sane Money, publUlMd In March 1933; and Stabilized Dol< 
lift— Fermaarot Prosperity, published in January 1037. Both are now out of print. 

o